Determinants of fiscal space: An empirical analysis for OECD countries

The concept of fiscal space, which has gained importance especially after the 2008 global crisis, can be broadly defined as a budgetary possibility that provides resources to a government for a targeted purpose without negatively affecting the sustainable financial position of the government. Fiscal space is mostly associated with the concepts of fiscal sustainability and debt sustainability in the literature and generally discussed in terms of creation methods, measurement methods, and its relationship with other policies. The main objective of this study is to empirically reveal the impacts of the determinants of fiscal space and to present policy recommendations within this framework. For the empirical analysis, two different fiscal space indicators are calculated within the de facto fiscal space approach put forward by Aizenman and Jinjarak (2010) and the debt limit-based approach of Ostry et al. (2010). Accordingly, this study analyzes the impacts of selected macroeconomic, institutional, political and global variables (determinants of fiscal space) on the calculated fiscal space indicators by using panel data techniques for 27 OECD countries in between 1999 and 2020. Our findings suggest that in addition to macroeconomic variables, institutional and political variables also have significant impact on fiscal space. On the other hand, global variables do not have direct impact on fiscal space but have an indirect impact by characterizing the global environment in terms of global liquidity.