The impact of budgetary and political institutions on fiscal cyclicality: Evidence from Egypt

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Abstract

We investigate the cyclicality of fiscal policy in Egypt during the period of 1976–2019 with a focus on how budgetary and political institutions affect fiscal performance during economic cycles. We define new variables for budgetary and political institutions and incorporate them in a vector error correction model (VECM) and impulse response functions (IRFs) analysis. While current and capital spending are proven to behave procyclically, revenues respond countercyclically during business cycles. Poor political and budgetary institutions have a negative impact on the primary deficit in a way that led to procyclical behaviour in fiscal policy in the long run. We recommend reinforcing the Golden Rule and changing the nature of the electoral system to a party-based to strengthen the role of parliament in keeping the government accountable.

Keywords: Fiscal Cyclicality, Budgetary Institutions, Political Institutions, Business Cycles, Electoral Systems, Principal Agent, Common Pool

Authors’ individual contribution: Conceptualization — S.E.-K. and M.Z.; Methodology — S.E.-K. and M.Z.; Software — S.E.-K. and M.Z.; Validation — S.E.-K. and M.Z.; Formal Analysis — S.E.-K. and M.Z.; Investigation — S.E.-K. and M.Z.; Writing — Original Draft — S.E.-K. and M.Z.; Writing — Review & Editing — S.E.-K. and M.Z.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

Acknowledgements: Authors would like to express their thanks to Chahir Zaki for his valuable discussion and comments on an earlier version of this paper at the Economic Research Forum 26th Annual Conference (2019). Moreover, the authors appreciate the contribution of Dina Abdelazeem in executing the econometric models in the paper using STATA software package.

JEL Classification: H3, H5

Received: 22.04.2021
Accepted: 12.07.2021
Published online: 13.07.2021

How to cite this paper: El-Khishin, S., & Zaky, M. (2021). The impact of budgetary and political institutions on fiscal cyclicality: Evidence from Egypt. Journal of Governance & Regulation, 10(3), 72–84. https://doi.org/10.22495/jgrv10i3art6