OECD Economics Department Working Papers

ISSN :
1815-1973 (online)
DOI :
10.1787/18151973
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Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.
 

What Promotes Fiscal Consolidation

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Authors:
Stéphanie Guichard1, Mike Kennedy, Eckhard Wurzel1, Christophe André1
Author Affiliations
  • 1: OECD, France

Publication Date
28 May 2007
Bibliographic information
No.:
553
Pages
38
DOI
10.1787/180833424370

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Fiscal consolidation is required in most OECD countries. This is especially so in view of mediumand long-term spending pressures on public finances, related, inter alia, to ageing. Based on a dataset covering a large number of OECD fiscal consolidation episodes starting in the late 1970s, the paper presents evidence, both descriptive and econometric, on macroeconomic conditions and policy set-ups that have been effective in triggering and sustaining fiscal consolidation. Main findings include: Large initial deficits and high interest rates have been important in prompting fiscal adjustment and also in boosting the overall size and duration of consolidation. Concerning the quality of fiscal policies, an emphasis on cutting current expenditures has been associated with overall larger consolidation. Fiscal rules with embedded expenditure targets tended to be associated with larger and longer adjustments, pointing to institutional features playing a potentially important role in generating successful consolation efforts. Experience across countries also shows that certain design features such as transparency, flexibility to face shocks and effective enforcement mechanisms seem important for the effectiveness of fiscal rules.
Keywords:
government revenue, government spending, deficit, public debt, fiscal consolidation, fiscal rules
JEL Classification:
  • H11: Public Economics / Structure and Scope of Government / Structure, Scope, and Performance of Government
  • H62: Public Economics / National Budget, Deficit, and Debt / Deficit; Surplus
  • H63: Public Economics / National Budget, Deficit, and Debt / Debt; Debt Management; Sovereign Debt