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Does corruption cause public finance deficit?
Turko, Dominik ; Houdek, Petr (advisor) ; Skopeček, Jan (referee)
With the use of panel data from the year 2005 to 2009 tracking the 27 EU member countries, it is tested; wheather corruption causes public finance deficits. The indicator control of corruption, which is a part of WGI (World Governance Indicators) is used as the main measure of corruption-level. This rate is annually compiled by the World Bank organization. Corruption effects deficit through lower tax revenues. Lower tax revenues are the consequence of lower rate of growth. The second main transmission channel between corruption and deficit is the higher public expenditures, which are the result of inefficiency of public investment (Kaufmann, 2010). With the help of the fixed-effects model the introductory hypothesis has been verifyed. Improvement of the measure control of corruption by one unit leads to the reduction of the public finance deficit as the share of GDP by about 4 pp. The hypothesis, that the size of government affects the deficit negatively has also been verified. The increase of the size of the government as the share of public expenditure of GDP of 1 pp causes the increase of deficit of 0,26 pp. The membership in EMU represents an encreace of deficit by 2 pp. First, the economic freedom reduces deficits of public finance, but later it has the opposite effect.
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