Politics, Government Size, and Fiscal Adjustment in Industrial Countries

It is now well established that political and institutional factors matter for fiscal outcomes. Following a review of the literature, this paper examines the relationship between a variety of political-institutional variables and fiscal aggregates-encompassing the overall balance as well as expenditure and revenue and their various components-across 19 industrial countries over the past two decades. It finds strong effects on fiscal policy from such factors as type of electoral system, degree of legislative or government fragmentation, and stability of government. Some of the strongest results emerge for certain components of expenditure, such as transfers, and for the balance between labor and consumption taxation. There are clear relationships between the type of political system and choice of tax and expenditure system. The paper also examines fiscal adjustment since the late 1980s in light of these political factors, finding some evidence of a reversal in trend, but only when growth has been high or when debt has become problematic.Fiscal policy;Political economy;expenditure, taxation, fiscal adjustment, total expenditure, government spending, fiscal balance, fiscal performance, fiscal rules, tax burden, budgetary institutions, expenditure levels, budget deficits, tax share, public expenditure, composition of government spending, fiscal outturns, fiscal institutions, fiscal outcomes, fiscal discipline, government expenditure, budget deficit, public spending, fiscal transparency, tax rates, fiscal consolidation, fiscal policy outcomes, national budget, fiscal deficits, public expenditure management, fiscal profligacy, fiscal position, taxes on labor, fiscal affairs department, expenditure management, fiscal adjustments, public deficits, expenditure adjustment, fiscal positions, fiscal indiscipline, fiscal variable, fiscal affairs, budgetary process, government budget deficit, expenditure ratios, fiscal targets, budgetary rules, fiscal policy coordination, budgetary consolidation, fiscal authorities, expenditure restraint, public debt, fiscal sustainability, fiscal criteria, government revenue, fiscal aggregates, fiscal crises, tax base, composition of expenditure, fiscal policy frameworks, fiscal responsibility, fiscal variables, reduction in transfers, expenditure management reform, consumption expenditure, primary expenditure, government budget, public expenditure management reform, fiscal expansions, public finance, fiscal experiences, composition of government expenditure, loose fiscal policy, expenditure ratio, fiscal tightening, tax system, budget balance, long-term fiscal sustainability, expenditures, structural fiscal, fiscal convergence