The Effects of the Fiscal Stress Index and Knowledge Components on Environmental Quality

Economic shocks and structural budget imbalances result in a situation whose continuation under uncertain conditions would lead to the stress phenomenon in governments. Fiscal stress as an unstable situation in governmental financing can exacerbate the inability to meet short- and long-term financial obligations and excessive dependence on the budget. Considering the importance of managing fiscal resources in improving environmental quality and calculating the fiscal stress index for 30 selected OECD countries during 2000–2020, we analyzed its impacts on environmental quality using the system generalized method of moments (GMM). This study emphasizes the knowledge components involved in the impacts of fiscal stress on environmental quality. The results indicate that the effects of fiscal stress and its square root are at lower levels in equations including knowledge components, especially education, and development of human resources and innovation system than in the equation estimated without knowledge variables. According to the results, establishing the knowledge economy in the functional framework of the government can reduce the attenuation of the financing system, the imbalance between income and expense, and the budget deficit. Additionally, the results show that education and technology are more effective in reducing pollution in developed countries than in the quality of regulations and governance.