# **Literature review**

There is remarkably little in the fiscal literature on public expenditure as a possible driver of fiscal crises, perhaps because of the more discretionary nature of some primary public expenditures through top-down budgeting. Ultimately a Minister of Finance can always resort to draconian cuts regardless of their impact on public services, medium term development, poverty and shared prosperity. A rich literature exists on how capital spending is usually the casualty in such cuts. There is a more recent literature on fiscal rigidity situations, where the discretion of the Finance Minister to make cuts is limited. We discuss this further in section 3 where we adopt the approach in Cetrangolo et al (2010), but see also See Alier (2007) for a discussion of budget rigidities in Argentina, Brazil, Chile, and Ecuador.

There are many examples of boom-bust spending patterns which suggest on/off application of political discretion, and are well documented for Latin America by Clements, Faircloth and Verhoeven (2007), and Alesina, Campante & Tabellini (2008).<sup>9</sup> But we were unable to find literature that discusses fiscal crises from the perspective of a need for early warning systems based around public spending trends.

Fiscal early warning became highly topical again among U.S. states since the financial crisis.<sup>10</sup> Many such measures are solvency and liquidity based, focusing on the state’s assets, fund balances and revenue side of the budget. Since the crisis, revenue indicators are looking more for over-reliance on windfalls due to asset prices or unbalanced and unsustainable growth. Few fiscal stress indicators focus on expenditures, however.

Most of the macro literature relating to early warning of impending fiscal crises has looked at debt-induced episodes of fiscal stress, and considers debt thresholds. See for instance Kraay and Nehru (2004) and Presbitero (2012), which both estimate thresholds for a sustainable level of debt based on episodes of fiscal stress and debt default.

We believe that in part, the gap in the literature around public spending trends, spending cuts, and their relationship with service delivery may be because - until the BOOST initiative – there has been extreme paucity of highly disaggregated public spending data at country level.

Before sections 4 and 5 go on to illustrate the value and economic meaning of momentum, force and rigidity measures with four country case studies, the next section demonstrates the macroeconomic predictive power of force as a possible early warning of episodes of expenditure induced fiscal stress.

> 9 Clements, Faircloth and Verhoeven (2007) Public Expenditure in Latin America: Trends and Key Policy Issues, IMF Working Paper WP/07/21 analyzes the volatility and cyclicality in primary expenditures in Latin America from 1996-2006.  They note that while real spending increases were well contained across the region during 2003–04, they accelerated over subsequent years.

> Alberto Alesina & Filipe R. Campante & Guido Tabellini, 2008. "Why is Fiscal Policy Often Procyclical?," Journal of the European Economic Association, MIT Press.

> 10 Fiscal Indicators: A Proactive Approach to Local Government Financial Assistance" , Mary Taylor, Ohio Auditor of State (2009)