The Political Economy of Fiscal Consolidation

Abstract:     
This paper explores the political economy of fiscal adjustment. It begins with an examination of the evidence for, and sources of, ‘deficit bias’, including political and governance factors, public attitudes, the role of financial markets and imprecision about which debt targets should be pursued. It then examines the evidence regarding the exogenous and policy-related factors which affect the success of fiscal consolidation efforts. This is followed by a discussion of the role of fiscal institutions, including fiscal rules and autonomous agencies. The final section considers how the political economy of fiscal policy has changed with the financial crisis, giving some indications as to what may be needed to re-establish a consolidation path and make it less prone to setbacks.

Keywords: public expenditure, taxation, fiscal policy, fiscal sustainability, institutions, deficit, debt, fiscal consolidation, budgets, political economy

JEL Classification: E62, E65, H30, H60, H61, H62, H63

working papers series