Fiscal Consolidation: Part 5. What Factors Determine the Success of Consolidation Efforts?

Abstract

The global economic and financial crisis exacerbated the need for fiscal consolidation in many OECD countries. Drawing lessons from past episodes of fiscal consolidation, this paper investigates the economic environments, political settings and policy measures conducive to fiscal consolidation and debt stabilisation using probit, duration, truncated regression and bivariate Heckman selection methods. The empirical analysis builds on the earlier literature and extends it to include new aspects that may be of importance for consolidating governments. The empirical analysis confirms previous findings that the presence of fiscal rules – expenditure or budget balance rules – is associated with a greater probability of stabilising debt. Crucial in determining the causal link behind the association, the results also reveal an independent role for such rules over and above the impact of preferences for fiscal prudence. Also, while the analysis confirms that spending-driven adjustments vis-à-vis revenue-driven ones are more likely to stabilise debt, it also reveals that large consolidations need multiple instruments for consolidation to succeed. Sub-national governments, in particular state-level governments can contribute to the success of central government consolidation, if they co-operate. To ensure that state-level governments do co-operate, having the right regulatory framework with the extension of fiscal rules to sub-central government levels is important. Consolidation budgétaire : Partie 5. Quels sont les facteurs qui conditionnent la réussite des efforts d'assainissement budgétaire ? La crise economique et financiere mondiale a exacerbe l.imperatif d.assainir les finances publiques dans de nombreux pays de l.OCDE. Tirant les enseignements des episodes passes de reequilibrage budgetaire, ce document analyse les facteurs economiques, politiques et strategiques favorables a l.assainissement des finances publiques et a la stabilisation de la dette en utilisant la methode des probits, les modeles de duree, de regression tronquee et de selection en deux etapes de Heckman. L.analyse empirique s.inspire de travaux anterieurs qu.elle enrichit en integrant d.autres aspects qui peuvent etre importants pour les autorites qui optent pour une trajectoire d.assainissement budgetaire. Cette analyse empirique confirme les resultats anterieurs qui montraient que l.existence de regles budgetaires . regles de depenses ou d.equilibre budgetaire . est associee a une plus forte probabilite de stabilisation de la dette. Essentiels pour determiner le lien de causalite qui sous-tend cette association, les resultats revelent par ailleurs que ces regles jouent un role independant au-dela des effets d.une politique axee sur la prudence budgetaire. En outre, l.analyse confirme que les mesures de restriction des depenses sont plus susceptibles de stabiliser la dette que celles fondees sur l.augmentation des recettes, mais elle revele egalement que, pour reussir, les reequilibrages de grande ampleur doivent s.appuyer sur de multiple instrumen...

Short-term fiscal imbalance comparison in V4 countries using a dynamic conditional correlation approach

“…In several cases, the type of the consolidation was not possible to determine. Many pieces of research (such as Molnar, 2012;Nickelet et al, 2010;etc. ) consider expenditure-based consolidation as successful because of its association with reforms that increase the efficiency of budgetary procedures.…”

“…Condition "cold shower" (CD) an improvement of the cyclically adjusted primary balance (CAPB) of at least:1.5 % of GDP in one single year "gradual consolidation" (GC) an improvement of the cyclically adjusted primary balance (CAPB) of at least 1.5 % of GDP over a period of three years where in each single year the improvement of the CAPB is less than 1.5 % of GDP and the CAPB does not deteriorate by more than 0.5 % of GDP compared to the year before Source: Mihóková et al, (2016). 1998, 2001, 2003, 2013CZ 2004, 2013HU 1999, 2003, 2008, 2012PL 2011, 2012 Source: Authors, own processing based on data form Eurostat.…”

The pace of fiscal consolidations, fiscal sustainability, and welfare: An overlapping generations approach

“…When considering the pace of consolidation, it is also important to know as to the type of consolidation that is more effective between spending cuts and tax increases. According to the literature survey by Molnar (2012), earlier studies are not conclusive on this issue. Some studies (e.g., Ardagna, 1998, 2009;von Hagen et al, 2002;Guichard et al, 2007) indicate that consolidation based on expenditure cuts are found to be more effective while others (e.g., Alesina and Perotti, 1995;Tsibouris et al, 2006) find that revenue-based consolidations can be effective.…”

“…Next, k t+1 = 0 locus is above the threshold curve since k t+1 = 0 realizes eventually only when (k t , b t ) is above the threshold curve. Furthermore, from (34) and (35), if τ w t = τ t = 1, k t+1 = 0 always binds whereas τ t = 1 does not always bind if k t+1 = 0. Then, the condition of τ t = 1 is above k t+1 = 0 locus.…”

Making public finances more growth and equity-friendly in the euro area

“…The tax-spending mix of consolidation episodes also matters for inequality, with spending-based episodes generally more harmful than revenuebased ones (Woo et al, 2013). This creates potential trade-offs between equity and other objectives, since spending-based consolidations are often regarded as more favourable to long-term growth and more likely to stabilise debt (Molnar, 2012). At a more disaggregated level, some changes in budget composition may also pose growth-equity trade-offs, such as when shifting taxation from direct to indirect taxes, but others are beneficial on both counts, such as when increasing the share of education in public spending (Fournier and Johansson, 2016).…”