What Affects Fiscal Consolidation? – Some Evidence from OECD Countries
24 Pages Posted: 14 Feb 2012
Date Written: March 29, 2007
Stéphanie Guichard, Michael Kennedy, Eckhard Wurzel and Christophe André examine the circumstances most commonly related to successful fiscal consolidation. Data are drawn from a dataset covering twenty-four OECD countries since 1978. Based on improvement in the cyclically-adjusted primary balances (CAPB), they detect eighty-five consolidation episodes. First the paper presents descriptive evidence that initial conditions play a major role. In particular, the more negative the CAPB, the larger the ensuing consolidation. In the vast majority of cases, consolidations did not last long and involved only modest gains, and revenue increases accounted for a large fraction of the average improvement. In the second part of the paper, the authors deploy regression analysis to identify a number of macroeconomic conditions that were effective in triggering and sustaining consolidations. The initial budget balance is statistically significant in explaining the starting point, the size and the duration of the adjustment process, while the magnitude and the probability of success of the consolidation programme are affected by cuts in some expenditure items.
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