Fiscal adjustment in a panel of countries 1870-2016

Area of Science:

• Economics
• Macroeconomics
• Public Finance

Background:

• The 2007 financial crisis and the COVID-19 pandemic led to significant increases in public sector deficits and debts globally.
• This has raised concerns regarding the necessity and methods of fiscal adjustment in numerous countries.

Purpose of the Study:

• To investigate fiscal adjustment mechanisms in response to public debt and deficits.
• To analyze historical data spanning over a century to understand long-term fiscal dynamics.

Main Methods:

• Utilized the Jordà-Schularick-Taylor Macrohistory Database for a panel of 17 countries from 1870 to 2016.
• Employed reduced-form models to analyze the relationship between fiscal variables and adjustment behaviors.

Main Results:

• Large deficits or surpluses generally induce stabilizing feedbacks, primarily through revenue adjustments.
• Countries experiencing deficits encounter greater pressure for fiscal adjustment compared to those with surpluses.
• The debt-to-GDP ratio demonstrates a limited capacity to prompt stabilizing adjustments via expenditure or revenue changes.

Conclusions:

• Fiscal policy exhibits a tendency towards self-correction, particularly through revenue streams, in response to deficit or surplus shocks.
• The debt-to-GDP ratio is a less effective driver of fiscal consolidation than immediate deficit or surplus positions.
• Understanding these historical fiscal dynamics is crucial for navigating contemporary concerns about public debt sustainability.