Working Papers, Santa Cruz Institute for International Economics 10-20
We define the notion of 'de facto fiscal space' of a country as the outstanding public debt relative to the de facto tax base, where the latter measures the realized tax collection, averaged across several years to smooth for business cycle fluctuations. We apply this concept to account for the cross-country variation in the fiscal stimulus associated with the global crisis of 2009- 2010. We find that greater de facto fiscal space prior to the global crisis, higher GDP/capita, higher financial exposure to the US, and higher inflation were associated with a higher fiscal stimulus/GDP during 2009-2010. Intriguingly, higher trade openness has been associated with lower fiscal stimulus.