The Fiscal-Budget Flexibility and the Expansion of COVID-19

Kebin Deng
School of Economics and Commerce
South China University of Technology
Higher education mega center，Guangzhou，510006, P.R.C.
Email: ecdengkb@scut.edu.cn, Tel: 86-020-39381128

Feng Lin*
School of Economics and Commerce
South China University of Technology
Higher education mega center，Guangzhou, 510006, P.R.C.
Email: fenglin@scut.edu.cn, Tel: 86-020-39381128

Puman Ouyang
Department of Economics
National Chung Cheng University
168, University Rd., Min-Hsiung, Chia-Yi 62102, Taiwan, R.O.C.
Email: pouyang@ccu.edu.tw, Tel: 886-05-2720411

Electronic copy available at: https://ssrn.com/abstract=3570436

 The Fiscal-Budget Flexibility and the Expansion of COVID-19
Abstract: This paper documents the daily COVID-19 case-growth rates in the low
fiscal flexibility countries are significantly higher than those in the high-flexibility
countries by 49.1% averagely, given other conditions under the same. Moreover, the
impact of fiscal-budget flexibility only functions when the expansion of COVID-19 is
not out of hand, e.g., is still in a moderate speed.
Key words: Fiscal-Budget Flexibility; Constitutional Budget-Balance Rules;
COVID-19

1. Introduction
A novel coronavirus (COVID-19) disease is spreading rapidly worldwide. Along
with medical measures for fighting the pandemic, many countries provide
unprecedented fiscal stimulus packages to restore the aggregate demand. With
government direct payments and jobless aid, people may not have to rush to work
outside and gather in the special period. Therefore, fiscal expansion may not only ease
the economic pain but also prevent the further spreading of this pandemic.
This paper examines whether the flexibility of fiscal budget would substantially
reduce the expansion speed of COVID-19. Following Heinemann et al. (2016) and
Asatryan et al. (2018), we utilize data on whether a country has constitutional
balanced-budget-rules (BBRs) or non-constitutional BBRs or no BBR at all, to
measure the rigidity of its fiscal budget. We find that the expansion speed of
COVID-19 cases is higher in countries with the lower fiscal-budget flexibility.
Two streams of literature are closely related to our study. First focuses on the
effects of macroeconomic policies on public health care, such as controlling of
tobacco products and alcoholic beverages (Sassi et al., 2013; Myerson et al., 2020).
Second is the literature on COVID-19, addressing the key spreading determinants
such as social distancing, preventing large gatherings and travel quarantine (Adda,
2016; Litvinova et al., 2019; Chinazzi et al. 2020).

Electronic copy available at: https://ssrn.com/abstract=3570436

 2. Data, Variables and Empirical Strategy
2.1 Data and Variables
Our sample covers 195 COVID-19 involved economies from January 10, 2020 to
March 27, 20201.
Our key independent variables are the country fiscal-budget flexibility dummies.
Following Asatryan et al. (2018), we utilize the Comparative Constitutions Project
(CCP) dataset and IMF fiscal rules dataset which indicate that there are 20 economies
adopting constitutional BBRs, 51 adopting non-constitutional BBRs and 124 with no
BBR at all. We define the low/medium/high fiscal-budget flexibility countries as
those with constitutional balanced-budget-rules (BBRs)/non-constitutional BBRs
/without any BBRs respectively.
The dependent variable is the growth rate of confirmed COVID-19 cases in country
level. The data on COVID-19 are from the daily report of World Health Organization
(WHO). Specially, China’s data before January 23, 2020 are released by the National
Health Commission of China. We exclude the countries with confirmed period less
than five days. We also delete observations with a zero-growth rate of COVID-9 cases
because the zero record is very likely due to the report omission or the lack of
detection kit in that day or the fact that the disease is completely under control. We
winsorize the dependent variable at the top and bottom 1%. Finally, our sample size is
2696 observations.
We control other variables which may affect the expansion of COVID-19,
including real GDP per capita, population number, gender (male ratio) and aging
(ratio of ages 65 and above), provided by the World Development Indicators database,
and the government size (the government spending divided by GDP) obtained from
IMF’s World Economic Outlook database. We employ the 2018 year-end values of all
the control variables and log them.

2.2 Empirical Strategy

We use the fixed-effects panel design to detect the effect of fiscal-budget flexibility

                                                             
1
Up to March 27, 2020, there are totally 195 economies involved the attack of COVID-19 disease.

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on the expansion of COVID-19 as the follows:
Ln COVID growthit = β0 + β1Low flexibilityi + β2Medium flexibilityi
+ β3Low flexibilityi × Low COVIDit + β4Medium flexibilityi × Low COVIDit
+ β5Low COVIDit + δi Χi + λt + μc + ε it

where i and t indicate countries and days respectively. The dependent variable 

Ln COVID growth it   refers to the log value of each country’s daily growth rate of

confirmed COVID-19 cases. In the independent dummies, Low flexibilityi equals one

if an economy’s current constitution specifies a BBR and zero otherwise. Similarly,

Medium flexibilityi equals one if an economy has a non-constitutional BBR and zero

otherwise. Low COVIDit is the dummy variable defined as one if a country’s daily

growth rate of confirmed cases is below the sample median. The vector Χ i stands

for control variables including real GDP per capita, population, government size,

aging and gender. ε it is a standard error term. We control for the day fixed effects

( λt ). Since certain economies such as Mainland China, USA, and Italy have suffered

severely from the pandemic, we take specific-country fixed effects ( μc ) into account.

3. Results of Regressions
3.1 Summary Descriptions
Table 1 presents the group median test of the confirmed COVID-19 cases. It shows
that in the whole sample, low fiscal-budget flexibility group has the fastest expansion
speed of COVID-19, which is 27.1% on average. The difference between the median
in countries with high fiscal-budget flexibility and that in medium/low fiscal-budget
flexibility is statistically significant. Moreover, the group median differences are only
significant in low-COVID-growth samples. That said, the impact of fiscal-budget
flexibility only functions when the expansion speed of COVID-19 is under a
threshold.

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 Table 1 Group median comparison of the COVID growth
(1) (2) (3)
Low-flexible fiscal-budget Medium-flexible fiscal-budget High-flexible fiscal-budget
(with constitutional BBRs) (with non-constitutional BBRs) (without any BBRs)
Panel A
Whole sample  0.271 0.222 0.222
Between (1) and (2) Between (1) and (3) Between (2) and (3)
Difference
0.049(10.058***) 0.049(15.957***) 0.000(0.036)
Observations 246 925 1525
Panel B
High COVID growth
0.441 0.467 0.500
group
Between (1 ) and (2) Between (1) and (3) Between (2) and (3)
Difference
-0.026(0.313) -0.0591(0.000) -0.033(0.502)
Observations 154 454 743
Panel C
Low COVID growth
0.149 0.115 0.100
group
Between (1) and (2) Between (1) and (3) Between (2) and (3)
Difference
0.339(18.923***) 0.049(35.425***) 0.015(9.692***)
Observations 92 471 782
Notes: COVID growth is calculated as the COVID-19 cases in day t divided by the cases in day t-1, and minus 1.
The Pearson chi2 values are reported in parentheses; the null hypothesis is that both groups have the same median.
The low and high COVID growth groups are partitioned by the median of COVID-growth. ∗∗∗ indicates the 1%
significant level.

3.2 Results of the baseline regression

Table 2 reports the estimation results of equation (1). The coefficients associated
with the low and medium flexibility of fiscal budgets shown in column (2) are
significantly positive, highlighting that in contrast to high fiscal-budget flexibility
countries, low and medium fiscal-budget flexibility would suffer faster expansion of
COVID-19. The coefficient of low-flexibility is 0.491, larger than the coefficient of
the medium-flexibility (0.117). These evidences indicate that the countries adopting
tight fiscal budgets are associated with a prominent acceleration of COVID-19, which
is 49.1% higher than those adopting loose fiscal-budget.
Column (3) shows that the interaction terms of fiscal-budget flexibility and the
low COVID growth dummy are positive and strongly significant at the 1% level.
These findings are consistent with Table 1, addressing that the impact of fiscal-budget
flexibility would function only when the growth rate of COVID-19 is not out of hand.

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 Table 2 Fiscal-budget flexibility on the expansion of COVID-19
Dependent Variable:
Ln COVID growth (1) (2) (3)

Low flexibility 0.373*** 0.491*** -0.004

(0.069) (0.068) (0.065)
Medium flexibility -0.038 0.117** -0.023
(0.049) (0.054) (0.049)
Low flexibility × Low COVID 0.582***
(0.088)
Medium flexibility × Low COVID 0.296***
(0.065)
Low COVID -1.807***
(0.047)
Ln real GDP per capita -0.162*** -0.121***
(0.033) (0.022)
Ln population -0.109*** -0.071***
(0.017) (0.011)
Ln gender -5.196*** -1.852***
(0.662) (0.450)
Ln aging -0.584*** -0.214***
(0.079) (0.053)
Ln government size 0.797*** 0.431***
(0.089) (0.062)
Specific-Country effects YES YES YES
Day effects YES YES YES
Observations 2696 2383 2383
R2 0.239 0.359 0.670
Notes: Standard errors are White heteroskedasticity-corrected and reported in parentheses. Significant levels: ∗∗∗
1%, ∗∗ 5%, ∗ 10%. The intercept term is unreported for simplicity.

Moreover, the results indicate that real GDP per capita, population, aging and
gender are negatively associated with the speed of COVID-19, while government size
has a positive significant effect on COVID-19 expansion.

3.3 Robustness tests

The transparency of case information disclosure would mislead our results. High
fiscal-flexibility countries might underreport their COVID-19 cases. To rule out this
concern, we further look into the effects of fiscal flexibility in a more recent sample.
The clue is, even if high fiscal flexibility countries underreport their COVID-19 cases,
the underreporting degree should decrease in response to the passage of time and the
exacerbation of pandemic situation. If the distortion of underreporting is not salient,

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 the results in a more recent sample should be consistent with those in Table 2.

Table 3 Alternative tests: adjusting sample and fixed effects

(1) (2) (3) (4) (5) (6)
Dependent Variable: Sample excluding
Ln COVID growth   observations with less Including continent
More recent sample
than 100 confirmed effects
cases
Low flexibility 0.467*** -0.011 0.507*** 0.160** 0.216*** -0.162**
(0.067) (0.065) (0.095) (0.074) (0.064) (0.066)
Medium flexibility 0.144** 0.012 0.239*** 0.079 0.191*** -0.024
(0.056) (0.049) (0.076) (0.057) (0.053) (0.048)
Low flexibility × Low COVID 0.544*** 0.302*** 0.701***
(0.086) (0.109) (0.093)
Medium flexibility × Low COVID 0.233*** 0.176** 0.489***
(0.066) (0.081) (0.071)
Low COVID -1.746*** -1.295*** -1.844***
(0.046) (0.066) (0.051)
Ln real GDP per capita -0.148*** -0.106*** 0.030 0.002 -0.017 -0.056**
(0.033) (0.022) (0.044) (0.028) (0.039) (0.028)
Ln population -0.106*** -0.064*** 0.007 -0.036** -0.134*** -0.121***
(0.017) (0.012) (0.023) (0.016) (0.019) (0.015)
Ln gender -5.471*** -2.037*** -7.539*** -4.219*** -6.242*** -3.176***
(0.682) (0.461) (0.941) (0.622) (0.780) (0.558)
Ln aging -0.588*** -0.213*** -0.876*** -0.494*** -0.672*** -0.295***
(0.081) (0.054) (0.124) (0.078) (0.100) (0.072)
Ln government size 0.701*** 0.355*** 0.857*** 0.479*** -0.209* -0.255***
(0.097) (0.066) (0.114) (0.086) (0.107) (0.082)
Specific-Country effects YES YES YES YES NO NO
Day effects YES YES YES YES YES YES
Continent effects NO NO NO NO YES YES
Observations 2176 2176 1010 1010 2354 2354
R2  0.433 0.730 0.681 0.840 0.353 0.630
Notes: Standard errors are White heteroskedasticity-corrected and reported in parentheses. Significant levels: ∗∗∗
1%, ∗∗ 5%, ∗ 10%. The intercept term is unreported for simplicity.

To mitigate the underreport concern and other endogeneity concerns, we then

undertake following robustness exercises in Table 3. First, we estimate a more recent
sample starting from February 20, 2020 (column (1)and(2)), when the first case was
confirmed in Italy, the first outbreak country out of Asia. Second, we exclude those
observations with less than 100 confirmed cases (column (3)and(4)). Third, we
replace the specific-country fixed effects with the continent fixed effects, defined the
same as Asatryan (2018), and re-estimate the regression (column (5)-(6)).

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 Table 3 shows that the coefficients of Low flexibility and Medium flexibility in
columns (1), (3) and (5) are positive and strongly significant. The interaction terms in
columns (2), (4) and (6) are significantly positive, which are completely consistent
with our baseline results shown in Table 2.
4. Conclusion
This paper shows that fiscal-budget flexibility effectively helps countries slow the
expansion of COVID-19. In addition, the impact of fiscal-budget flexibility only
functions when the expansion of COVID-19 is not out of hand. Our results highlight
the substantial role of the fiscal flexibility on alleviating COVID-19 expansion.

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