On the Sustainability of Government Deficits: Some Long-Term Evidence for Spain, 1850-2000

The aim of this paper will be to provide a test of the sustainability of Spanish public finances over the period 1850-2000, from the estimation of a cointegration relationship between government expenditures and revenues derived from the intertemporal budget constraint. In this way, the longer than usual span of the data would allow us to obtain some more robust results on the fulfilling of the intertemporal budget constraint than in most of previous analyses. In addition, we will provide two additional robustness checks of the estimated relationship between government expenditures and revenues. First, given the extended length of the sample, we investigate the possibility of structural changes occurring along the period analyzed. To this end, we will make use of the new approach of Kejriwal and Perron (2008) to testing for multiple structural changes in cointegrated regression models. Second, as an extension of this analysis, we further investigate whether the behaviour of fiscal authorities had been non-linear. We will do this by means of the procedure developed by Hansen and Seo (2002), based on a threshold cointegration model that considers the possibility of a nonlinear relationship between government expenditures and revenues. In particular, provided that fiscal sustainability holds, we analyze if fiscal authorities would have adjusted the deficit only when the difference between expenditure and revenue exceeded a certain threshold, so ensuring the deficit sustainability in the long run.