Testing Fiscal Sustainability in the Transition Economies of Eastern Europe: The Case of Poland (1999-2015)

This paper reassesses the sustainability of public finances in Poland during the last two decades, characterized by the end of the macroeconomic stabilization phase and the implementation of several structural reforms. Cointegration tests allowing for regime-shifts reveal that fiscal policy is “weakly” sustainable, due to a significant divergence between revenues and expenditures in more recent years. Moreover, different from earlier research, I find strong support for bi-directional causality between revenues and expenditures. The main policy implication is that, in order to qualify for EMU membership, Poland should pursue further fiscal consolidation in the years ahead, implementing a more balanced fiscal-mix between revenue enhancement and expenditure reduction measures.