Are expenditure cuts the only effective way to achieve successful fiscal adjustment

We re-examine whether successful fiscal adjustments are characterized by spending cuts. We apply the Bai & Perron structural break filter instead of ad hoc rules to identify fiscal adjustments in 20 OECD countries. Our estimates using conditional fixed effects logit models suggest that we cannot reject the hypothesis that the change in expenditures is equal to the change in revenues in successful fiscal adjustments. Most political-economy variables considered are not robustly related to successful fiscal adjustments. However, we find evidence that the political fragmentation of government affects the likelihood to observe a successful fiscal adjustment.
 
Keywords: fiscal adjustment, fiscal consolidation
JEL classifications: H200, H300, H500, H620

Working paper no. 477