Submitted February 2010.
Macro-Fiscal Volatility and the Composition of Public Spending*
Article first published online: 1 DEC 2011
© 2011 The Authors Fiscal Studies © 2011 Institute for Fiscal Studies
Volume 32, Issue 4, pages 511–538, December 2011
How to Cite
Riscado, S. M., Stančík, J. and Välilä, T. (2011), Macro-Fiscal Volatility and the Composition of Public Spending. Fiscal Studies, 32: 511–538. doi: 10.1111/j.1475-5890.2011.00149.x
- Issue published online: 1 DEC 2011
- Article first published online: 1 DEC 2011
- tax volatility;
- public investment;
- public consumption
Earlier empirical literature has examined some long- and medium-term aspects of macro-fiscal volatility while leaving its short-term fiscal impact unexplored. To help fill that gap, we examine the impact of macro-fiscal volatility on the composition of public spending. To that end, we analyse a panel of 10 EU countries during 1991–2007. Our results suggest that increases in the volatility of regularly-collected and cyclical revenues such as the VAT and income taxes tend to tilt the expenditure composition in favour of public investment. In contrast, increases in the volatility of ad hoc taxes such as capital taxes tend to favour public consumption spending, albeit only a little. We interpret such volatility innovations as conveying news to the fiscal policymaker about the underlying economic conditions, with especially regularly-collected and cyclical taxes prompting short-term cyclical fine-tuning.