Politics, Government Size, and Fiscal Adjustment in Industrial Countries

Abstract

The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or lMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. It is now well established that political and institutional factors matter for fiscal outcomes. Following a review of the literature, this paper examines the relationship between a variety of political-institutional variables and fiscal aggregates-encompassing the overall balance as well as expenditure and revenue and their various components-across 19 industrial countries over the past two decades. It finds strong effects on fiscal policy from such factors as type of electoral system, degree of legislative or government fragmentation, and stability of government. Some of tbe strongest results emerge for certain components of expenditure, such as transfers, and for the balance between labor and consumption taxation. There are clear relationships between the type of political system and choice of tax and expenditure system. The paper also examines fiscal adjustment since the late 1980s in light of these political factors, finding some evidence of a reversal in trend, but only when growth has been high or when debt has become problematic.

The Effect of Development Aid Unpredictability and Migrants’ Remittances on Fiscal Consolidation in Developing Countries

“…This is justified by the fact that the GDP growth may have indirect effects on the prospects for fiscal consolidation (e.g. it may be easier to bear the political cost of adjustment when growth is strong; see Annett, 2002).…”

The Causes of Excessive Deficits in the European Union

“…Grilli et al (1991), de Haan andSturm (1994) and Annett (2002) find that public deficits tend to be higher when government turnover is higher. Alesina and Tabellini (1987) have already emphasized that when political power alternates frequently between competing parties, the higher will be the deficit and debt bias.…”

“…Furthermore, using a quadratic formulation, Mélitz (2000) shows that this latter effect is stronger than the former when the debt is (very) high. Empirical evidence provided by Annett (2002) for 19 OECD countries shows that countries tend to make an effort to improve their budget balances especially when the public debt is sufficiently high. 2 Another group of authors argue that a good assessment of a country's public finances requires a disaggregated analysis of its government budget.…”

“…2 Another group of authors argue that a good assessment of a country's public finances requires a disaggregated analysis of its government budget. Perotti et al (1998), Annett (2002) and Perotti and Kontopoulos (2002) show that the loss of control over the budget is largely due to increases in public expenditures. Their results indicate that to regain control over the deficit, governments should cut their expenditures on some specific items such as transfers, subsidies and wages.…”

“…In fact, some authors believe that the fragmentation of the government is a more important source of public deficits. Roubini and Sachs (1989), Perotti et al (1998), de Haan et al (1999, Annett (2002) andPerotti andKontopoulos (2002) show that public spending and deficits are higher when coalition governments are in office, that is, when the number of parties in the government is high. These authors argue that coalition governments have a bias towards larger deficits because when multiple parties participate in a coalition they are representing different interests, and to maintain the coalition it is necessary to accommodate those interests by satisfying their budgetary needs.…”