Economic, political and institutional determinants of fiscal deficit

Marija Vukovic
2017 Zbornik Radova: Pravni Fakultet u Novom Sadu  
This paper seeks basic economic and political causes of instability and rising fiscal deficit. Economic factors that may cause the appearance and increase in the fiscal deficit are: growth of current public spending, launching public investments, tax cuts and weakening financial discipline. The government's policy that is a result of its coalition agreement, everywhere in the world, is the primary factor that causes the formation and growth of the fiscal deficit. The aim is to show that the
more » ... o show that the politically unstable countries with weak institutions are often vulnerable to fiscal shocks, which, in turn, lead to the greater instability in the fiscal deficit. Keywords: tax cuts; fiscal illusion; intergenerational redistribution of the burden of public debt; spatial separation of interests; budgetary institutions. 3 Tax smoothing means that the state will have high deficits when government spending is very high and small surpluses in the rest period. See more: Olivier Blanshard, Makroekonomija, Mate, Zagreb 2005, 567. 4 Intertemporal budget means interim spending of items from the budget. The state can spend its budgetary revenues immediately, or to keep it for the future. 5 The reason for the reduction of taxes can be a reduction in the overall tax burden which can be explained by the already mentioned square rule. According to this rule, the size of the tax burden grows as the square of the tax rate. If the tax rate is lower at present than in the future, the surplus can reduce the total surplus of the tax burden. Decrease in future tax rates is possible if the surplus reduces the tax burden in the future to a greater extent. Of course, the lost revenue must be offset by higher tax rates in the present, or to the square rule, increasing the burden is less than the fall of the tax burden in the future.
doi:10.5937/zrpfns51-13798 fatcat:hecasaliwrggdnoucj656vgnau