Fiscal Sustainability Across Government Tiers

XREAP2007-14

FISCAL SUSTAINABILITY ACROSS GOVERNMENT TIERS ^a

Peter Claeys, Raul Ramos and Jordi Surinach^b

Grup d’Anàlisi Quantitativa Regional (AQR-IREA)

Universitat de Barcelona

Abstract:

This paper analyses how fiscal adjustment comes about when both central and sub-national
governments are involved in consolidation. We test sustainability of public debt with a fiscal
rule for both the federal and regional government. Results for the German Lander show that
lower tier governments bear a relatively smaller part of the burden of debt consolidation, if they
consolidate at all. Most of the fiscal adjustment occurs via central government debt. In contrast,
both the US federal and state levels contribute to consolidation of public finances.

Keywords: Fiscal policy, fiscal rules, EMU, SGP, fiscal federalism.

JEL Codes: E61, E62, H11, H72, H77.

^a We would like to thank Gebhard Kirchgassner, Paulo Mourao, Reinhard Neck, Christian Richter,
Vicente Royuela, Bas Van Aarle, two anonymous referees, and seminar participants at Universitat de
Barcelona, the Annual Meeting of Austrian Economists and the INFER conference in Coimbra for useful
comments and suggestions. All remaining errors are ours. Raùl Ramos and Jordi Surinach gratefully
acknowledge the support received from the Spanish DGI SEJ2005-04348/ECON project. Peter Claeys
acknowledges support by a Marie Curie Intra-European Fellowship within the 6^th European Community
Framework Programme.

^b Correspondence address: Grup d’Anàlisi Quantitativa Regional AQR IREA, Universitat de Barcelona,
Facultat de Ciències Econdmiques i Empresarials, Departament d’Econometria, Estad^stica i Economia
Espanyola, Torre IV, Av. Diagonal, 690, E-08034 Barcelona, Spain. Email: [email protected].

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