Institutions for fiscal stability.

• Author: Alesina, Alberto

The seventies and most of the eighties have been a period of fiscal profligacy in many countries around the world. Several OECD countries have accumulated debt/GDP ratios which are unprecedented, except for the aftermath of major wars. Low public savings have been at the root of Latin America's "lost decade," the eighties. Currently, the goal of achieving and maintaining fiscal stability is the main macroeconomic issue in many parts of the world.

This evolution of fiscal policy raises many intriguing questions: Why have many but not all countries abandoned fiscal discipline? What explains the very large cross-country variance in fiscal stance? Why did large and persistent deficits appear in the mid-seventies and not before? What explains the likelihood of success of fiscal adjustments? Why did certain countries make swift and very successful fiscal consolidations, while others are still struggling?

The answers to all of these questions cannot rely purely on economic factors since economically similar countries exhibit very large differences in fiscal performance. In a series of recent papers, I have addressed these questions by considering politico-institutional explanations.

In a paper(1) coauthored with Roberto Perotti, I identify two critical institutional variables as important determinants of the fiscal policy stance: the degree of government fragmentation, and the nature of budget institutions. In terms of the former variable, we argue that coalition governments are more likely to delay the adoption of stabilization policies, because of inter-coalition struggles leading to legislative deadlocks. Thus, after the oil shocks of the seventies, countries ruled by fragmented coalitions reacted more slowly and less decisively, letting budget deficits accumulate. In a second paper,(2) we show that when coalition governments actually attempt to stabilize the budget, they often fail because they do not have the political strength to deal with structural budget cuts in social spending and government wages.

While this argument about government fragmentation is relatively well understood, the issue of budget institutions is more complex and multifaceted. In the last few years a vast research program to which I have contributed has investigated how different procedures influence fiscal outcomes, both in the OECD group of countries, and in a sample of Latin American countries and the American states. This research effort leads to the conclusion that budgetary institutions do matter as a determinant of fiscal outcomes, and therefore different choices about fiscal institutions may lead to a higher or lower propensity to run excessive deficits.

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