Are Budget Rigidities a Source of Fiscal Distress and a Constraint for Fiscal Consolidation?
This paper studies whether budget rigidities affect the probability of countries getting into fiscal distress and reduce the likelihood of governments performing fiscal adjustments. Budget rigidities are constraints that limit the ability of the go...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2019
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/250821565096379368/Are-Budget-Rigidities-a-Source-of-Fiscal-Distress-and-a-Constraint-for-Fiscal-Consolidation http://hdl.handle.net/10986/32209 |
| Summary: | This paper studies whether budget
rigidities affect the probability of countries getting into
fiscal distress and reduce the likelihood of governments
performing fiscal adjustments. Budget rigidities are
constraints that limit the ability of the government to
change the size and structure of the public budget in the
short term. Budget rigidities stem from different
institutional arrangements and therefore can take different
forms. To build an indicator of rigid spending that is
comparable across a large set of countries, this paper
employs a simple definition based on budget components that
are naturally inflexible: the sum of public wages, pensions,
and debt service. It decomposes this measure into a
structural component and a nonstructural component. Then,
the paper applies a linear probability model to a panel of
182 advanced and developing countries. A key finding is that
relatively high shares of rigid (observed) components of
public spending contribute to countries getting into fiscal
distress and are a constraint for fiscal consolidation. The
paper finds evidence that a relatively high share of
nonstructural rigid spending contributes to the probability
of fiscal distress and reduces the probability of fiscal
consolidation. Moreover, the effect of rigid expenditure
seems to be more relevant for economies with high
inequality, governments with lower margins of majority, and
countries with lower institutional quality. In addition,
when looking at the composition of the measure of rigid
expenditure, there is also some evidence that higher
expenditure on pensions reduces the probability of fiscal
adjustment more robustly than higher expenditure on wages. |
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