On the sustainability of government deficitssome longterm evidence for Spain, 1850-2000

Abstract

In this paper, we provide a test of the sustainability of the Spanish government deficit over the period 1850-2000, from the estimation of a cointegration relationship between government expenditures and revenues derived from the intertemporal budget constraint. The longer than usual span of the data would allow us to obtain some more robust results on the fulfilling of the intertemporal budget constraint than in most of previous analyses. Two additional robustness checks of the results are also provided. First, we investigate the possibility of structural changes occurring along the period analyzed, using the new approach of Kejriwal and Perron (2008) to testing for multiple structural changes in cointegrated regression models. Second, we further investigate whether the behaviour of fiscal authorities had been nonlinear, by means of the procedure of Hansen and Seo (2002) based on a threshold cointegration model. Our results show that (i) the government deficit would have been strongly sustainable in the long run, (ii) no evidence was found on any significant structural break throughout the whole period, and (iii) fiscal sustainability was attained due to the non-linear behaviour of fiscal authorities, so that actions on the budget deficit were taken only when it exceeded around 4.5% of GDP.