Picking the Right Budget Constraint for Scotland

This position paper considers the devolution of further fiscal powers to the Scottish Parliament in the context of the objectives and remit of the Smith Commission. The argument builds on our discussion of fiscal decentralization made in our previous published work on this topic. We ask what sort of budget constraint the Scottish Parliament should operate with. A soft budget constraint (SBC) allows the Scottish Parliament to spend without having to consider all of the tax and, therefore, political consequences, of that spending, which is effectively the position at the moment. The incentives to promote economic growth through fiscal policy – on both the tax and spending sides are weak to non-existent. This is what the Scotland Act, 1998, and the continuing use of the Barnett block grant, gave Scotland. Now other budget constraints are being discussed – those of the Calman Commission (2009) and the Scotland Act (2012), as well as the ones offered in 2014 by the various political parties – Scottish Conservatives, Scottish Greens, Scottish Labour, the Scottish Liberal Democrats and the Scottish Government. There is also the budget constraint designed by the Holtham Commission (2010) for Wales that could just as well be used in Scotland. We examine to what extent these offer the hard budget constraint (HBC) that would bring tax policy firmly into the realm of Scottish politics, asking the Scottish electorate and Parliament to consider the costs to them of increasing spending in terms of higher taxes; or the benefits to them of using public spending to grow the tax base and own-sourced taxes? The hardest budget constraint of all is offered by independence but, as is now known, a clear majority of those who voted in the referendum did not vote for this form of budget constraint. Rather they voted for a significant further devolution of fiscal powers while remaining within a political and monetary union with the rest of the UK, with the risk pooling and revenue sharing that this implies. It is not surprising therefore that none of the budget constraints on offer, apart from the SNP’s, come close to the HBC of independence. However, the almost 25% fall in the price of oil since the referendum, a resource stream so central to the SNP’s economic policy making, underscores why there is a need for a trade off between a HBC and risk pooling and revenue sharing. Ranked according to the desirable characteristic of offering something approaching a HBC the least desirable are those of the Calman Commission, the Scotland Act, 2012, and Scottish Labour. In all of these the ‘elasticity’ of the block grant in the face of failure to grow the Scottish tax base is either not defined or is very elastic – meaning that the risk of failure is shuffled off to taxpayers outside of Scotland. The degree of HBC in the Scottish Conservative, Scottish Greens and Scottish Liberal Democrats proposals are much more desirable from an economic growth point of view, the latter even embracing the HBC proposed by the Holtham Commission that combines serious tax policy with welfare support in the long-run. We judge that the budget constraint in the SNP’s proposals is too hard as it does not allow for continuation of the ‘welfare union’ in the UK. We also consider that in the case of a generalized UK economic slow requiring a fiscal stimulus that the Scottish Parliament be allowed increased borrowing to be repaid in the next economic upturn.

Estimating the effects of fiscal policy under the budget constraint

I reconsider the short-term effects of fiscal policy when both government spending and taxes are allowed to respond to the level of public debt. I embed the long-term government budget constraint in a VAR, and apply this common trends model to US quarterly data. The results overturn some widely held beliefs on fiscal policy effects. The main finding is that expansionary fiscal policy has contractionary effects on output and inflation. Ricardian effects may dominate when fiscal expansions are expected to be adjusted by future tax rises or spending cuts. The evidence supports RBC models with distortionary taxation. We can discard some alternative interpretations that are based on monetary policy reactions or supply-side effects.

Asymmetrically fair rules for an indivisible good problem with a budget constraint

We study a particular restitution problem where there is an indivisible good (land or property) over which two agents have rights: the dispossessed agent and the owner. A third party, possibly the government, seeks to resolve the situation by assigning rights to one and compensate the other. There is also a maximum amount of money available for the compensation. We characterize a family of asymmetrically fair rules that are immune to strategic behavior, guarantee minimal welfare levels for the agents, and satisfy the budget constraint.

Should voters be afraid of hard budget constraint legislation? fiscal responsibility law in brazilian municipalities

This manuscript demonstrates that voters have nothing to be afraid of when new hard budget constraint legislation is implemented. Our claim is that this kind of legislation reduces the asymmetry of information between voters and incumbents over the budget and, as a consequence, the latter have incentives to increase the supply of public goods. As a nationwide institutional innovation, the Fiscal Responsibility Law (FRL) is exogenous to all municipalities; therefore, there is no self-selection bias in its implementation. We show that public goods expenditure increases after the FRL. Second, this increase occurs in municipalities located in the country’s poorest region. Third, our findings can be extended to the supply of public goods because the higher the expenditure with health and education, the greater the probability of incumbents being re-elected. Finally, there exists a “de facto” higher supply of public goods in education (number of per capita classrooms) after the FRL.

A költségvetési korlát megkeményítése a posztszocialista országokban = Hardening of the budget constraint in the post-socialist countries

A költségvetési korlát megkeményítése nem egyforma mértékben ment végbe minden posztszocialista gazdaságban. Egyes országokban messzire jutottak ebben a tekintetben, másokban viszont alig változott az indulóállapot. A tanulmány áttekinti a költségvetési korlát puhaságának különböző megnyilvánulásait: az állami támogatásokat, a puha adózást, a nem teljesítő bankkölcsönöket, a vállalatközi tartozások felgyülemlését és a kifizetetlen béreket. A jelenséget sokféle tényező okozza, amelyek többnyire együttesen jelentkeznek. Az állami tulajdon fenntartása kedvez a puha költségvetési szindróma megrögződésének, a privatizálás elősegíti a keményítést, de nem elégséges feltétele a kemény korlát érvényesítésének. Ehhez megfelelő politikai, jogi és gazdasági környezetet kell céltudatosan kialakítani. A posztszocialista átmenet kezdetén sokan azt hitték, hogy a hatékony piacgazdaság létrehozásához elegendő lesz megvalósítani a liberalizáció, privatizáció és stabilizáció "szentháromságát". Mára már kiderült, hogy a költségvetési korlát megkeményítése az említett három feladattal egyenrangúan fontos. Ahol ez nem valósul meg (például Oroszország), ott a privatizáció nem hozza meg a várt eredményt. ___________________ The budget constraint has not hardened to equal degrees in the various post-socialist countries. In some of them, a great deal has been done in this respect, while in others there has been hardly any change from the initial state. This study surveys the typical manifestations of softness of the budget constraint, such as state subsidies, soft taxation, non-performing loans, the accumulation of trade arrears between firms, and the build-up of wage arrears. Softness of the budget constraint is caused by several factors that tend to act in combination. Thus retention of state ownership helps to preserve the soft budget-constraint syndrome, while privatization encourages the budget constraint to harden, although it does not form a sufficient condition for it to happen. Purposeful development of the requisite political, legal and economic conditions is also required. It was widely maintained at the outset of the post-socialist transition that the 'Holy Trinity' of liberalization, privatization and stabilization would suffice to produce an efficient market economy. Since then, it has become clear that hardening the budget constraint needs to be given equal priority with these. Otherwise, the effects of privatization will fall short of expectations, as they have in Russia, for example.

A puha költségvetési korlát szindrómája a kórházi szektorban = The soft budget constraint syndrome in the hospital sector

A kutatások eddig főképpen azt vizsgálták, hogyan jelenik meg a puha költségvetési korlát szindrómája a vállalati szférában és a hitelrendszerben. A jelen cikk a kórházi szektorra összpontosítja a figyelmet. Leírja az események öt főszereplőjének, a betegnek, az orvosnak, a kórházigazgatónak, a politikusnak és a kórház tulajdonosának motivációit és magatartásuk ellentmondásos jellegét. A motivációk magyarázzák, miért olyan erőteljes a túlköltési hajlam és a költségvetési korlát felpuhulásának tendenciája. A döntési és finanszírozási folyamatok minden szintjén felfelé hárítják a túlköltés és eladósodás terheit. A cikk kitér a különböző tulajdonformák (állami, nonprofit és forprofit nem állami tulajdonformák) és a puha költségvetési korlát szindrómájának kapcsolatára. Végül normatív szempontból vizsgálja a jelenséget: melyek a költségvetési korlát megkeményítésének kedvező és kedvezőtlen következményei, és hogyan tükröződnek a normatív dilemmák az események résztvevőinek tudatában. ___________ Researches so far have examined mainly how the soft budget constraint syndrome appears in the corporate sphere and the credit system. This article concentrates on the hospital sector. It describes the motivations and the contradictory behaviour of the five main types of participant in the events: patients, doctors, hospital managers, politicians, and hospital owners. The motivations explain why the propensity to overspend and the tendency to soften the budget constraint are so strong. The burdens of overspending and indebtedness are pushed upwards at every level of the decision-making and funding processes. The article considers the connection between the soft budget constraint syn-drome and the various forms of ownership (state ownership and the non-profit and for-profit forms of non-state ownership). Finally, the phenomenon is examined from the normative point of view: what are the favourable and unfavourable consequences of hardening the budget constraint and how these are reflected in the consciousness of the participants in the normative dilemmas and events.

The Soft Budget Constraint. An introductory study to volume IV of the Life’s Work series

The author’s ideas on the soft budget constraint (SBC) were first expressed in 1976. Much progress has been made in understanding the problem over the ensuing four decades. The study takes issue with those who confine the concept to the process of bailing out loss-making socialist firms. It shows how the syndrome can appear in various organizations and forms in many spheres of the economy and points to the various means available for financial rescue. Single bailouts do not as such generate the SBC syndrome. It develops where the SBC becomes built into expectations. Special heed is paid to features generated by the syndrome in rescuer and rescuee organizations. The study reports on the spread of the syndrome in various periods of the socialist and the capitalist system, in various sectors. The author expresses his views on normative questions and on therapies against the harmful effects. He deals first with actual practice, then places the theory of the SBC in the sphere of ideas and models, showing how it relates to other theoretical trends, including institutional and behavioural economics and theories of moral hazard and inconsistency in time. He shows how far the intellectual apparatus of the SBC has spread in theoretical literature and where it has reached in the process of “canonization” by the economics profession. Finally, he reviews the main research tasks ahead.

Introduction of soft budget constraint as an analyzing tool into public management. The case of the Hungarian public administration reform

Public management reforms are usually underpinned by arguments that they will make the public administration system more effective and efficient. In practice, however, it is very hard to determine whether a given reform will improve the efficiency and effectiveness of the public administration system in the long run. Here, I shall examine how the concept of the soft budget constraint (SBC) introduced by János Kornai (Kornai 1979, 1986; Kornai, Maskin & Roland 2003) can be applied to this problem. In the following, I shall describe the Hungarian public administration reforms implemented by the Orbán government from 2010 onward and analyze its reforms, focusing on which measures harden and which ones soften the budget constraint of the actors of the Hungarian public administration system. In the literature of economics, there is some evidence-based knowledge on how to harden/soften the budget constraint, which improves/reduces the effectiveness and hence the efficiency of the given system. By using the concept of SBC, I also hope to shed some light on the rationale behind the Hungarian government’s introduction of such a contradictory reform package. Previously, the concept of SBC was utilized narrowly in public management studies, mostly in the field of fiscal federalism. My goal is to apply the concept to a broader area of public management studies. My conclusion is that the concept of SBC can significantly contribute to public management studies by deepening our knowledge on the reasons behind the success and failure of public administration reforms.

“Policy Scepticism” and the Impact of Scottish Higher Education Institutions (HEIs) on their Host Region: Accounting for Regional Budget Constraints under Devolution

A “policy scepticism” has emerged that challenges the results of conventional regional HEI impact analyses. Its denial of the importance of the expenditure impacts of HEIs appears to be based on a belief in either a binding regional resource constraint or a regional public sector budget constraint. In this paper we provide a systematic critique of this policy scepticism. However, while rejecting the extreme form of policy scepticism, we argue that it is crucial to recognise the importance of the public-sector expenditure constraints that are binding under devolution. We show how conventional impact analyses can be augmented to accommodate regional public sector budget constraints. While our results suggest that conventional impact studies overestimate the expenditure impacts of HEIs, they also demonstrate that the policy scepticism that treats these expenditure effects as irrelevant neglects some key aspects of HEIs, in particular their export intensity.

“Policy Scepticism” and the Impact of Welsh Higher Education Institutions (HEIs) on their Host Region: Accounting for Regional Budget Constraints

This paper replicates the analysis of Scottish HEIs in Hermannsson et al (2010b) for the case of Wales in order to provide a self-contained analysis that is readily accessible by those whose primary concern is with the regional impacts of Welsh HEIs. A “policy scepticism” has emerged that challenges the results of conventional regional HEI impact analyses. This denial of the importance of the expenditure impacts of HEIs appears to be based on a belief in either a binding regional resource constraint or a regional public sector budget constraint. In this paper we provide a systematic critique of this policy scepticism. However, while rejecting the extreme form of policy scepticism, we argue that it is crucial to recognise the importance of the publicsector expenditure constraints that are binding under devolution. We show how conventional impact analyses can be augmented to accommodate regional public sector budget constraints. While our results suggest that conventional impact studies overestimate the expenditure impacts of HEIs, they also demonstrate that the policy scepticism that treats these expenditure effects as irrelevant neglects some key aspects of HEIs, in particular their export intensity.

“Policy Scepticism” and the Impact of Northern Irish Higher Education Institutions (HEIs) on their Host Region: Accounting for Regional Budget Constraints

This paper replicates the analysis of Scottish HEIs in Hermannsson et al (2010b) for the case of Northern Ireland. The motivation is to provide a self-contained analysis that is readily accessible by those whose primary concern is with the regional impacts of Northern Irish HEIs. A comparative analysis will follow in due course. A “policy scepticism” has emerged that challenges the results of conventional regional HEI impact analyses. This denial of the importance of the expenditure impacts of HEIs appears to be based on a belief in either a binding regional resource constraint or a regional public sector budget constraint. In this paper we provide a systematic critique of this policy scepticism. However, while rejecting the extreme form of policy scepticism, we argue that it is crucial to recognise the importance of the public sector expenditure constraints that are binding under devolution. We show how conventional impact analyses can be augmented to accommodate regional public sector budget constraints. While our results suggest that conventional impact studies overestimate the expenditure impacts of HEIs, they also demonstrate that the policy scepticism that treats these expenditure effects as irrelevant neglects some key aspects of HEIs, in particular their export intensity.

Soft budget constraints in a dynamic general equilibrium model

This paper considers an overlapping generations model in which capital investment is financed in a credit market with adverse selection. Lenders’ inability to commit ex-ante not to bailout ex-post, together with a wealthy position of entrepreneurs gives rise to the soft budget constraint syndrome, i.e. the absence of liquidation of poor performing firms on a regular basis. This problem arises endogenously as a result of the interaction between the economic behavior of agents, without relying on political economy explanations. We found the problem more binding along the business cycle, providing an explanation to creditors leniency during booms in some LatinAmerican countries in the late seventies and early nineties.

Investment focused strategies in electricity markets using the ITEM-game simulator

This paper presents a methodology to establish investment and trading strategies of a power generation company. These strategies are integrated in the ITEM-Game simulator in order to test their results when played against defined strategies used by other players. The developed strategies are focused on investment decisions, although trading strategies are also implemented to obtain base case results. Two cases are studied considering three players with the same trading strategy. In case 1, all players also have the same investment strategy driven by a market target share. In case 2, player 1 has an improved investment strategy with a target share twice of the target of players 2 and 3. Results put in evidence the influence of the CO2 and fuel prices in the company investment decision. It is also observed the influence of the budget constraint which might prevent the player to take the desired investment decision.

The use of technology in Portuguese hospitals: The case of MRI

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Economics from the NOVA – School of Business and Economics

Perfil de internamentos por Depressão Major no SNS português nos anos de 2008 e 2013 : variação em período de crise económica

RESUMO - O início da crise económica global colocou Portugal num contexto de restrição orçamental que gerou repercussões em várias áreas, especificamente na saúde mental das pessoas, evidenciadas a partir de 2009. O objetivo deste trabalho foi analisar o impacto da crise económica no perfil de internamentos por Depressão Major na população em idade ativa nos hospitais do SNS em Portugal Continental. Tratou-se de um estudo epidemiológico, observacional, descritivo e transversal. Foi efetuada uma análise individual, concretizada através da análise dos episódios de internamento; e ecológica, ao nível de distritos; nos anos de 2008 e 2013. Foram analisados dados relativos aos episódios de internamento, à população em idade ativa e às camas de internamento de psiquiatria. Os resultados permitem afirmar que os distritos com menores índices de urbanização e de densidade populacional apresentaram taxas de internamento por Depressão Major, na população em idade ativa, mais elevadas, e os seus habitantes apresentaram um risco de internamento superior, em ambos os períodos. Observou-se um aumento da taxa de internamentos e do risco de internamento por Depressão Major, na maioria dos distritos, no período de crise económica. Adicionalmente, verificou-se que a taxa de internamentos foi influenciada positivamente pelo número de camas disponíveis e ocorreu um aumento do número de internamentos por Depressão Major por cama de internamento disponível, no período de crise económica. Este estudo, de carater exploratório e com limitações identificadas, permitiu observar a variação geográfica e temporal do internamento por Depressão Major fomentando a necessidade de investigação futura neste âmbito.