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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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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Castro, Vítor, 2017. "The impact of fiscal consolidations on the functional components of government expenditures," Economic Modelling, Elsevier, vol. 60(C), pages 138-150.
    3. Antonio Afonso & Jose Alves, 2015. "The Role of Government Debt in Economic Growth," Hacienda Pública Española, IEF, vol. 215(4), pages 9-26, December.
    4. 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.
    5. 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.
    6. repec:eee:poleco:v:48:y:2017:i:c:p:128-143 is not listed on IDEAS
    7. repec:eee:poleco:v:48:y:2017:i:c:p:54-73 is not listed on IDEAS
    8. 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.
    9. Vitor Castro, 2016. "On the behaviour of the functional components ofgovernment expenditures during fiscal consolidations," NIPE Working Papers 11/2016, NIPE - Universidade do Minho.
    10. 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.
    11. Alexandru MINEA & Jean-Louis COMBES & Weneyam Hippolyte BALIMA, 2015. "Sovereign Debt Risk in Emerging Countries: Does Inflation Targeting Adoption Make Any Difference?," Working Papers 201504, CERDI.
    12. 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.
    13. 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.

    More about this item

    Keywords

    Public debt; Fiscal consolidation; Government efficiency; Labor market institutions; Product market institutions; Structural reforms;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • 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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