Date of Award

Summer 8-8-2017

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Public Management and Policy

First Advisor

Sally Wallace

Second Advisor

Charles Hankla

Third Advisor

W Bartley Hildreth

Fourth Advisor

Gregory B. Lewis

Fifth Advisor

Ross Rubenstein

Abstract

This three-essay dissertation focuses on the political economy of fiscal rules in a comparative context and highlights their unintended consequences – an issue that has received relatively little attention in public financial management literature. The first essay examines whether numerical limits on deficits, or balanced budget rules, influence the composition of public spending, particularly in the social sector. Using a combination of fixed effects and GMM regressions on a large panel of developed and developing economies, this essay finds that while deficit targets are effective in improving fiscal balances, they also tend to reduce social spending on health and social protection. This effect is particularly prominent in democratic countries, which often witness overspending problems. Countries that are considering adoption of such rules should carefully examine the effects of these requirements on expenditures that may have long-term positive externalities. Policymakers should explore mechanisms to minimize the distortionary effects of fiscal limits on spending composition.

The second essay focusses on whether the adoption of deficit targets by subnational governments in India influenced the composition of public spending. Using a combination of fixed effects and GMM regressions, this essay finds that the adoption of Fiscal Responsibility and Budget Management (FRBM) legislation by Indian states improved their budget balances significantly. However, the post-FRBM period also witnessed significant cuts in development spending. Furthermore, states have reduced their capital outlay and social spending after the adoption of fiscal responsibility laws. Reduced expenditure on development, and capital projects may affect long-term economic growth, therefore future amendments to the FRBM law should explore mechanisms to minimize the distortionary impacts of fiscal targets on the composition of subnational spending.

The third essay shifts attention to the effect of supermajority voting requirements on credit ratings and borrowing costs in the subnational debt market in the United States. Using a combination of generalized ordered logit and linear regression analyses on a sample of general obligation bonds issued by American state governments between 2001 and 2014, this essay finds that states with supermajority voting requirements for tax increases are more likely to receive a lower credit rating on their bonds. Furthermore, on average, the states with a supermajority voting requirement pay a premium of 18 to 21 basis points in true interest cost for their bonds. States that are considering adopting supermajority requirements should consider the unintended effects in terms of lower credit ratings and higher borrowing costs while adopting or designing such fiscal rules. The findings of this dissertation inform the policy debate on the subject and improve our understanding of the impact of fiscal institutions that are being increasingly adopted to regulate the behavior of governments across the world.

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