Fiscal sustainability in developed and developing countrie new evidence from dynamic panel data and threshold regression

Abstract

Fiscal sustainability is expressed in various dimensions using different definitions and indicators. It emphasises a government’s ability to sustain its current spending and specific target of the public debt-to-GDP ratio. Two fiscal sustainability indicators are currently popular: primary gap and recursive algorithm. However, these indicators cannot provide an in-depth analysis of the fiscal sustainability indicators. Therefore, this study constructs new indicators by incorporating FinTech and a shadow economy. The level of FinTech impacts fiscal sustainability through e-budgeting and e-taxation. The size of the shadow economy harms fiscal policies, such as higher levels of tax burden, government spending and public debt-to-GDP ratio. Institutions can also significantly contribute to fiscal sustainability, which implies that a higher quality of institutions stimulates a higher fiscal sustainable level. This study proposes that the first objective is to construct new fiscal sustainability indicators by incorporating various dimensions of FinTech and a shadow economy. The second objective is to determine the impact of the debt rule on new fiscal sustainability indicators. The third objective is to examine threshold levels of public debt-to-GDP ratio and budget deficit on new fiscal sustainability indicators by considering institutions. This study selects a sample consisting of 142 developed and developing countries, including high-income, middle-income and low-income countries, from 1985 to 2018. In addition, some methods, such as principal component analysis, two-step system GMM, dynamic panel threshold regression and cross-section threshold regression, are used to address the study objectives. The main findings reveal that new fiscal sustainability indicators incorporating FinTech and shadow economy dimensions provide a better assessment. This is supported by the lower value of the new fiscal sustainability indicators compared with the existing ones. Another finding shows that the debt rule has a significant and positive impact with different magnitudes and levels of significant on the existing and new fiscal sustainability indicators. The final findings can be expressed as follows: (a) the threshold levels of public debt-to-GDP ratio on fiscal sustainability indicators for developed countries obtain a minimum threshold point of 51.23% and a maximum of 59.56% by considering three institutional indicators, while that for developing countries reach a minimum level of 56.07% and a maximum of 61.35%; (b) the threshold levels of budget deficit-to-GDP ratio on fiscal sustainability indicators for developed countries consist of a minimum level of 0.05% and a maximum of 0.41% by considering three institutional indicators, while that for developing countries were at a minimum level of 1.93% and a maximum of 3.34%; (c) the threshold levels of public debt-to-GDP on new fiscal sustainability indicator incorporating FinTech for developed countries were about 100.37% in 2014 and 90.09% in 2017, while that for developing countries were about 63.04% in 2014 and 84.28% in 2017 by considering a specific institutional indicator; (d) the threshold levels of budget deficit-to-GDP ratio on new fiscal sustainability indicator incorporating FinTech for developed countries were around 3.04% in 2014 and 0.97% in 2017 by considering a specific institutional indicator, while that for developing countries were about 1.24% in 2014 and 5.75% in 2017, and (e) regulatory quality, rule of law and control of corruption contribute significantly on the threshold levels of public debt-to-GDP ratio and budget deficit. Therefore, the policymakers should increase the level of FinTech and suppress the size of shadow economy to guarantee fiscally sustainable level. Besides, they can set debt rule to stimulate fiscally sustainable level following a certain level of public debt-to-GDP ratio. The policymakers should also set a certain level of public debt-to-GDP ratio and budget deficit. Moreover, they are challenged to improve the quality of regulatory quality, rule of law and control of corruption.