Why do governments cut their deficits?

Abstract

Using discrete choice models, this paper examines the macroeconomic and political factors motivating more than 450 fiscal consolidation episodes in 185 countries during the period 1979–2019. In emerging and developing countries, consolidations are more likely during “good times”: when growth is high, and countries experience positive terms of trade shocks with low inflation. In these countries, governments with a high margin of majority, regardless of how long they have been in power, are also more likely to consolidate fiscal accounts. The opposite seems to be the case in advanced economies, where more “mature” governments are more likely to implement fiscal consolidations and the consolidations themselves are more likely during periods of subdued growth. Evidence also suggests that tax-based consolidations may be relatively more politically challenging to implement. Finally, consolidations in advanced economies are relatively more likely to take place in the presence of fiscal rules.