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The Political Economy of Delaying Fiscal Consolidation

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  • Boris Cournède

Abstract

Over the next decades, many OECD countries are anticipating large increases in public spending as a result of population ageing and other long-term structural trends. The need to put public finances on a sustainable footing is widely recognised, but progress has been uneven and slow. Some policy makers may feel that action can be deferred for a few years at little cost because of the long-term nature of the problem. This paper questions this perception by proposing a model of the political costs of consolidating public finances. The main finding is that even a short delay increases political cost of consolidation quite markedly when ultimately policy makers are facing a deadline by which sustainability must be restored. The conclusion is very robust to changes in assumptions and specification. A variant of the model shows that with an infinite horizon the incentive to consolidate is weaker, which highlights the importance of setting a deadline. This paper relates to the 2007 Economic Survey of the Euro area (www.oecd.org/eco/surveys/euroarea). L'économie politique du retard à consolider les finances publiques De nombreux pays de l'OCDE s'attendent à enregistrer de forte hausses de leurs dépenses publiques en raison du vieillissement démographique et d'autres tendances structurelles lourdes. Presque tout le monde s'accorde à reconnaître qu'il est nécessaire de rétablir la viabilité des finances publiques, mais peu de progrès ont été enregistrés. Il se pourrait que certains décideurs considèrent que la mise en oeuvre de mesures puisse être reportée pour quelques années sans qu'il n'en coûte beaucoup. Cette étude met en cause ce jugement en proposant un modèle du coût politique de la consolidation budgétaire. Le résultat principal est que même un court délai augmente le coût politique de la consolidation de manière importante lorsqu'au final les décideurs sont confrontés à une date limite à laquelle la viabilité budgétaire doit être rétablie. Ce résultat est très robuste à des changements d'hypothèses ou de spécification. Une variante du modèle montre qu'avec un horizon temporel infini l'incitation à consolider est plus faible, ce qui souligne combien il importe de fixer une date limite. Ce document se rapporte à l'Étude économique de zone euro 2007 (www.oecd.org/eco/etudes/zoneeuro).

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File URL: http://dx.doi.org/10.1787/240788215175
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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 548.

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Date of creation: 09 Mar 2007
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Handle: RePEc:oec:ecoaaa:548-en

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Keywords: public finances; population ageing; political economy; structural adjustment; fiscal consolidation; consolidation budgétaire; finances publiques; vieillissement démographique; économie politique; ajustement structurel;

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Cited by:
  1. Douglas Sutherland & Peter Hoeller & Rossana Merola, 2012. "Fiscal Consolidation: Part 1. How Much is Needed and How to Reduce Debt to a Prudent Level?," OECD Economics Department Working Papers 932, OECD Publishing.
  2. Daniel Kanda, 2011. "Modeling Optimal Fiscal Consolidation Paths in a Selection of European Countries," IMF Working Papers 11/164, International Monetary Fund.

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