How Do Other Countries Balance Their Budgets?
December 29, 2010
American Enterprise Institute (AEI) scholars Andrew Biggs, Kevin Hassett, and Matt Jensen have a piece in today’s Wall Street Journal (subscription req’d) summarizing new research into successful and unsuccessful efforts to balance countries’ budgets:
To be blunt, countries in fiscal trouble generally get there by making years of concessions to their left wing, and their fiscal consolidations tend to make too many as well. As a result, successful consolidations are rare: In only around one-fifth of cases do countries reduce their debt-to-GDP ratios by the relatively modest sum of 4.5 percentage points three years following the beginning of a consolidation.[…]
[T]he typical unsuccessful consolidation consisted of 53% tax increases and 47% spending cuts. By contrast, the typical successful fiscal consolidation consisted, on average, of 85% spending cuts.[…] Consistent with other studies, we found that successful consolidations focused on reducing social transfers, which in the American context means entitlements, and also on cuts to the size and pay of the government work force.
In their study, they also emphasize that different types of spending cuts or tax increases have different effects.