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Government efficiency, institutions, and the effects of fiscal consolidation on public debt

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  • Heylen, Freddy
  • Hoebeeck, Annelies
  • Buyse, Tim
Abstract
We study the evolution of the ratio of public debt to GDP during 132 fiscal episodes in 21 OECD countries in 1981–2008. Our main focus is on debt dynamics during 40 consolidation periods. To define these periods we use data on the evolution of the underlying cyclically adjusted primary balance, and as such avoid biases that may be induced by one-off budgetary measures. The paper brings new evidence on the role of public sector efficiency for the success of fiscal consolidation. First, we confirm that consolidation programs imply a stronger reduction of the public debt ratio when they rely mainly on spending cuts, except public investment. Government wage bill cuts, however, only contribute to lower public debt ratios when public sector efficiency is low. Second, we find that a given consolidation program will be more effective in bringing down debt when it is adopted by a more efficient government apparatus. Third, more efficient governments adopt consolidation programs of better composition. As to other institutions, consolidation policies are more successful when they are accompanied by product market deregulation, and when they are adopted by left-wing governments. By contrast, simultaneous labor market deregulation may be counterproductive during consolidation periods.

Suggested Citation

  • Heylen, Freddy & Hoebeeck, Annelies & Buyse, Tim, 2013. "Government efficiency, institutions, and the effects of fiscal consolidation on public debt," European Journal of Political Economy, Elsevier, vol. 31(C), pages 40-59.
    • Handle: RePEc:eee:poleco:v:31:y:2013:i:c:p:40-59
    DOI: 10.1016/j.ejpoleco.2013.03.001
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    3. Khurram Ejaz Chandia & Sania Riaz & Attiya Y. Javid & Muhammad Badar Iqbal & Mariam Azam & Ifra Gul, 2019. "Assessment of Public and External Debt Sustainability Using Debt Dynamics Equation Approach: A Comparative Study of Pakistan and India," Millennial Asia, , vol. 10(1), pages 25-55, April.
    4. Aizenman, Joshua & Jinjarak, Yothin & Spiegel, Mark M., 2023. "Fiscal capacity and commercial bank lending under COVID-19," Journal of the Japanese and International Economies, Elsevier, vol. 68(C).
    5. Balima, Wenéyam Hippolyte & Combes, Jean-Louis & Minea, Alexandru, 2017. "Sovereign debt risk in emerging market economies: Does inflation targeting adoption make any difference?," Journal of International Money and Finance, Elsevier, vol. 70(C), pages 360-377.
    6. Kelbesa Megersa & Danny Cassimon, 2015. "Public Debt, Economic Growth, and Public Sector Management in Developing Countries: Is There a Link?," Public Administration & Development, Blackwell Publishing, vol. 35(5), pages 329-346, December.
    7. Moulaye Bamba & Jean-Louis Combes & Alexandru Minea, 2020. "The effects of fiscal consolidations on the composition of government spending," Applied Economics, Taylor & Francis Journals, vol. 52(14), pages 1517-1532, March.
    8. Weneyam Hippolyte Balima & Jean-Louis Combes & Alexandru Minea, 2015. "Sovereign Debt Risk in Emerging Countries: Does Inflation Targeting Adoption Make Any Difference?," Working Papers halshs-01128239, HAL.
    9. Georgantas, Georgios & Kasselaki, Maria & Tagkalakis, Athanasios, 2023. "Τhe effects of fiscal consolidation in OECD countries," Economic Modelling, Elsevier, vol. 118(C).
    10. Sergey Zhavoronkov & Konstantin Yanovskiy & Kirill Rodionov, 2015. "Political Factors of the Cuts and Surges in Government Spending: The Effects on Old Market Democracies and Post-Communist Countries," Working Papers 146, Gaidar Institute for Economic Policy, revised 2015.
    11. Asatryan, Zareh & Heinemann, Friedrich & Pitlik, Hans, 2017. "Reforming the public administration: The role of crisis and the power of bureaucracy," European Journal of Political Economy, Elsevier, vol. 48(C), pages 128-143.
    12. M. Castellani & L. Fanelli & M. Savioli, 2015. "Government fiscal efforts vs. labour union strikes. Strategic substitutes or complements?," Working Papers wp1013, Dipartimento Scienze Economiche, Universita' di Bologna.
    13. Piotr Ciżkowicz & Andrzej Rzońca & Rafał Trzeciakowski, 2015. "Windfall of Low Interest Payments and Fiscal Sustainability in the Euro Area: Analysis through Panel Fiscal Reaction Functions," Kyklos, Wiley Blackwell, vol. 68(4), pages 475-510, November.
    14. Joshua Aizenman & Yothin Jinjarak & Mark M. Spiegel, 2022. "Fiscal Stimulus and Commercial Bank Lending Under COVID-19," Working Paper Series 2022-04, Federal Reserve Bank of San Francisco.
    15. Breuer, Christian, 2013. "On the Identification and Macroeconomic Effects of Discretionary Changes in Fiscal Policy," MPRA Paper 52056, University Library of Munich, Germany, revised 22 Nov 2013.
    16. Vítor Castro, 2018. "Functional components of public expenditure, fiscal consolidations, and economic activity," Economics and Politics, Wiley Blackwell, vol. 30(1), pages 124-150, March.
    17. Cooray, Arusha & Özmen, Ibrahim, 2024. "The role of institutions on public debt: A quantile regression approach," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 912-928.
    18. Amine Lahiani & Ameni Mtibaa & Foued Gabsi, 2022. "Fiscal Consolidation, Social Sector Expenditures and Twin Deficit Hypothesis: Evidence from Emerging and Middle-Income Countries," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 64(4), pages 710-747, December.
    19. George Economides & Dimitris Papageorgiou & Apostolis Philippopoulos, 2017. "The driving forces of the current Greek great depression," Working Papers 201703, Athens University Of Economics and Business, Department of Economics.
    20. Papageorgiou, Dimitris & Vourvachaki, Evangelia, 2017. "Macroeconomic effects of structural reforms and fiscal consolidations: Trade-offs and complementarities," European Journal of Political Economy, Elsevier, vol. 48(C), pages 54-73.
    21. Mahieddine Adnan Ghecham, 2020. "Further attempt to explain the oil curse mechanism using a debt overhang concept," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 48(4), pages 852-868, October.
    22. Vitor Castro, 2016. "On the behaviour of the functional components ofgovernment expenditures during fiscal consolidations," NIPE Working Papers 11/2016, NIPE - Universidade do Minho.
    23. Herwartz, Helmut & Theilen, Bernd, 2014. "Partisan influence on social spending under market integration, fiscal pressure and institutional change," European Journal of Political Economy, Elsevier, vol. 34(C), pages 409-424.
    24. Law, Siong Hook & Ng, Chee Hung & Kutan, Ali M. & Law, Zhi Kei, 2021. "Public debt and economic growth in developing countries: Nonlinearity and threshold analysis," Economic Modelling, Elsevier, vol. 98(C), pages 26-40.

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    More about this item

    Keywords

    Public debt; Fiscal consolidation; Government efficiency; Labor market institutions; Product market institutions; Structural reforms;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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