Can successful fiscal adjustments only be achieved by spending cuts?

Abstract

We re-examine the conventional view that to be successful, fiscal adjustments should rely on spending cuts and not on tax increases. We apply the Bai-Perron structural break filter to identify fiscal adjustments and their successfulness in 20 OECD countries. Our results suggest that the composition of fiscal adjustments is not related to their success. Furthermore, we find that political-economy variables considered are not robustly related to successful fiscal adjustments with one exception: the probability of a successful fiscal adjustment increases if left-wing governments rely on spending cuts and right-wing governments rely on tax increases.The views expressed do not necessarily reflect the views of De Nederlandsche Bank. We like to thank participants in the 2016 conference of the European Public Choice Society (March, 2nd -April 2nd, 2016 in Freiburg), in particular our discussant Jao Jalles, and a seminar at the Fiscal Affairs Department at the IMF, and two anonymous referees for their comments on a previous version of the paper.

National fiscal rules and fiscal discipline in the European Union

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