How long can austerity persist? The factors that sustain fiscal consolidations

Abstract

To put public debt on a sustainable path, many governments face the task of enacting large fiscal consolidation followed by years of sustained primary surpluses. By estimating hazard functions for the duration of consolidations, we analyse the features of past consolidation efforts across a panel of advanced economies. Our contribution is to identify the factors that help to start and sustain consolidations, separately discussing governments’ “commitment” to the cause as well as their “capacity” for action. Our analysis suggests that longer consolidations are initiated when public debt is high, fiscal deficits are large, the interest burden heavy and long-term sovereign bond yields elevated. However, we also find that a countries’ “capacity” to change course is important. Higher initial private sector savings, a stronger external balance, a competitive position and stable financial conditions appear to provide more scope for governments to sustain longer-lasting consolidations. Once we have controlled for the initial macroeconomic conditions, there is a lesser role for governments’ commitment as reflected in factors such as the composition and the pace of the fiscal adjustment or the political cycle in explaining the duration of consolidation. However, commitment to permanent, rather than temporary, fiscal adjustment is key.

The potential growth impact of fiscal consolidations

“…They imply further that the expenditure-based fiscal consolidation can be conducted anytime regardless of the economic conditions, either in recessions or in the economic booms. Our analysis seems to disagree with the conventional wisdom that longer consolidations are initiated when public debt is high, fiscal deficits are large, the heavy interest burden, and long-term sovereign bond yields are elevated (Lodge & Rodriguez-Vives, 2013). So far, we have discussed the feasibility of fiscal consolidation in Indonesia partially using narrative approaches.…”

Explaining deviations from the Stability and Growth Pact: power, ideology, economic need or diffusion?

“…Third, an obvious explanation for deviation from policy is the fact that some countries may not have a choice but to deviate. For instance, one might expect that a country in economic decline would not be able to meet specific economic requirements (Beetsma and Uhlig 1999; de Haan et al 2004; Debrun et al 2009; Beetsma and Giuliodori 2010; Lodge and Rodriguez-Vives 2013). This explanation indicates economic need or strain.…”

“…In particular, they found that countries without administrative structures for a given policy area are the least capable of enforcing EU law. Lodge and Rodriguez-Vives (2013) contended that a country’s capacity to change course is the most important determinant of whether a country is able to follow the fiscal rules implemented by the EU. If these findings are correct, it is possible that countries facing severe economic distress are the most likely to break the SGP.…”

“…A negative GDP growth rate could have a significant effect on a country’s ability to adhere to the clauses of the SGP. Lodge and Rodriguez-Vives (2013) demonstrated that a low rate of GDP growth could have a large, negative effect on fiscal policy implementation. In addition, a continuing low rate of GDP growth could significantly impact a country’s ability to change course once the country has already broken a clause (Lodge and Rodriguez-Vives 2013).…”

Hidden costs of cuts: Austerity, civil service management and the motivation of public officials in Central and Eastern Europe after the crisis

“…The global financial crisis has provoked a new debate over the status and contribution of public administration research in the age of austerity (Kelly and Dodds 2012;Lodge and Wegrich 2012;Potter 2012). At the macro-level, research has concentrated on the vulnerability of the state in member states of the Organisation for Economic Co-operation and Development (OECD) (Lodge and Hood 2012), the type of responses that governments have selected to tackle the crisis (Armingeon 2012), and the political and economic determinants of fiscal consolidation (Lodge and Rodríguez-Vives 2013;Kickert et al 2015). With regard to the organisation of public administration, research has explored the impact of the crisis on administrative reform (Randma-Liiv and Kickert 2016), decision-making and coordination in public administration (Peters et al 2011;, human resources management practices (Parrado 2010;Demmke 2016), compensation packages (OECD 2012) and leadership competencies (Leslie and Canwell 2010;Lodge and Hood 2012).…”