Planned fiscal adjustments: Do governments fulfil their commitments?

Abstract

This article analyzes the causes and consequences of fiscal consolidation promise gaps, defined as the distance between planned fiscal adjustments and actual consolidations. Using 74 consolidation episodes derived from the narrative approach in 17 advanced economies during 1978–2015, the paper shows that promise gaps were sizeable (about 0.3% of gross domestic product per year or 1.1% of gross domestic product during an average fiscal adjustment episode). Both economic and political factors explain the gaps: for example, greater electoral proximity, stronger political cohesion and higher accountability were all associated with smaller promise gaps. Finally, governments that delivered on their fiscal consolidation plans were rewarded by financial markets and not penalized by voters.

Economy or austerity? Drivers of retrospective voting before and during the Great Recession

“…We are aware of the ongoing debate in the field arguing in favour of the so-called narrative approach (Devries et al, 2011), relying on budget plans and documentation from national and international authorities. Apart from the difficulties in adapting this method to our temporal horizon, there is evidence of consistent non-random "consolidation promise gaps" (Gupta et al, 2018), i.e. differences between planned and realized fiscal adjustments that could affect the interpretation of our results should we adopt that alternative approach.…”

Promised Fiscal Expansions and Politics: A European Union Assessment

“…In this paper, we employ the same method to identify promised fiscal expansions as Gupta et al ( 2018 ) used, in part, to identify promised fiscal adjustments. These authors, in essence, extended Alesina et al's ( 2015 ) dataset from 2012 to 2015 for a sample of 17 Advanced Economies.…”

“…That said, the narrative approach is also flawed as it largely relies on judgment calls and it may not eliminate entirely endogeneity problems. 13 In this paper, we employ the same method to identify promised fiscal expansions as Gupta et al (2018) used, in part, to identify promised fiscal adjustments. These authors, in essence, extended Alesina et al's (2015) dataset from 2012 to 2015 for a sample of 17 Advanced Economies.…”

“…We pay a closer attention to fiscal expansions since most of the literature has overly dedicated more time and effort inspecting various aspects of fiscal consolidations when this type of episodes typically accounts for a much smaller percentage of the total number of fiscal policy changes. 8 In fact, a recent paper by Gupta et al ( 2018 ) looked at causes and effects of consolidation promise gaps for a subsample of 17 advanced economies and this paper serves as the main motivation for us to now look to the other side of fiscal policy actions, that is, fiscal expansions. Second, which economic and political economy drivers of these expansionary promise gaps matter the most, if any?…”

(Non-)Keynesian Effects of Fiscal Austerity: New Evidence from a Large Sample

“…3 Such reasoning is sometimes also labelled as "the expectational view of fiscal policy" (see Hellwig and Neumann, 2014). 4 Gupta et al (2018) conclude that governments are not electorally penalized when they are successful to launch a fiscal consolidation at the same time that financial markets tend to recognize that success in bringing public finances to a sustainable trajectory.…”