THE FISCAL SPACE AND THE FISCAL STIMULUS DURING CRISIS IN THE WESTERN BALKANS

Abstract

The fiscal space of the Western Balkan 6 (WB6) economies has been significantly tested by recent crises, including the COVID-19 pandemic and the Energy and Food Price Crisis. This paper investigates the role of pre-crisis fiscal space in shaping fiscal stimulus measures during crises, by endogenizing an expanded set of fiscal space measures. Results reveal that WB6 nations, possessing some fiscal space before previous crises, encountered limitations in formulating and implementing fiscal stimulus measures amid subsequent crises. With fiscal space largely utilized during and post-pandemic, the ability to implement fiscal stimulus during the recent Energy and Food Price Crisis has been considerably restricted. These findings underscore the importance of building fiscal buffers during non-crisis times to maintain resilience for unforeseen challenges. The paper highlights the need for forward-looking fiscal policies, emphasizing the potential adverse effects of overly generous fiscal packages on fiscal sustainability, which could hamper future crisis response capabilities.