The Trinity of Budgetary Institutions, Political Institutions and Fiscal Cyclicality: Evidence from Egypt - Economic Research Forum (ERF)

The Trinity of Budgetary Institutions, Political Institutions and Fiscal Cyclicality: Evidence from Egypt

Sarah El Khishin and Mohamed Zaky


Date:
October, 2019

NO.
1351

Publisher:
Economic Research Forum

Topic:
H3. Fiscal Policies and Behavior of Economic Agents
H5. National Government Expenditures and Related Policies

Fiscal policy is empirically proven in many papers as procyclical in developing countries as a result of longstanding weaknesses in budgetary and political institutions. We investigate the cyclicality of fiscal policy in Egypt and the influence of budgetary and political institutions on fiscal indicators during economic cycles. We measure the cyclicality of different components of the Egyptian budget in a disaggregated manner. Golden rule violation in Egypt adversely affected fiscal aggregates and contributed to adopting a countercyclical behavior during business cycles; then a procyclical policy over the long run when debt and deficit reach uncontained levels. Moreover, common pool, principal-agent and voracity problems in Egypt have also influenced the cyclicality of fiscal policy in Egypt as they have lead into an exacerbated pressure on public expenditure during booms and recessions in the examined period. Re-adopting the Golden rule to control the current spending trends and limit discretionary fiscal interventions is recommended. In the longer term, we recommend enhancing the quality of political institutions through changing the electoral system towards a party-based, rather than an individual-based system in order to moderate opportunistic abuse of fiscal aggregates and limit political influences over the budget.

Authors

Sarah El Khishin

Lecturer at the Department of Economics, British University in Egypt


Authors

Mohamed Zaky

Lecturer in Economics, Faculty of Economics and Political Science, Cairo University


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