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

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.