The determinants of fiscal deficits: a survey of literature

This paper surveys the existing literature, both theoretical and empirical, on the determinants of fiscal deficits. The theoretical literature highlights the role of the Ricardian equivalence theory, the Keynesian theory, the neoclassical theory, and political budget cycle hypothesis in shaping the current discourse on budget deficits and their effects on other variables. A review of the empirical studies reveals that: economic growth, debt, unemployment rates, trade openness, level of development (GDP per capita), level of urbanization, extreme weather events, current account balances, inflation, aid, military spending, as well as political factors, and quality of budgetary institutions are important determinants of budget deficits. While research on the linkage between the structure of the economy and persistence of the budget deficit is limited, evidence shows that tax base variability is associated with procyclical fiscal policy. Beyond these findings, the determinants of fiscal deficits are country-specific. Implications for future research are discussed.