Political and Economic Determinants of Budget Deficits in the Industrial DemocraciesThis paper focuses on the management of fiscal deficits and the public debt in the industrial democracies. Given the large deficits in many OECD countries in recent years, and the resulting sharp rise in the public debt, it is important to determine the economic and political forces leading to such large deficits. We find only partial support for the "equilibrium approach to fiscal policy", which assumes that tax rates are set over time in order to minimize the excess burden of taxation. Tax rates do not seem to be smoothed, and budget deficits in many countries in recent years appear to be too large to be explained by appeal to transitory increases in government spending. We suggest that in several countries the slow rate at which the post-'73 fiscal deficits were reduced resulted from the difficulties of political management in coalition governments. There is a clear tendency for larger deficits in countries characterized by a by a short average tenure of government and by the presence of many political parties in a ruling coalition |
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8t+i approach to fiscal Austria average tenure Belgium budgetary burden of taxation Bureau of Economic coalition members coalition partners DBYLPOL deadweight loss debt to GDP debt-GNP ratio Denmark denoted discounted value dummy variable Economic Research equation equilibrium approach equilibrium model excess burden expected expenditures Fifth Republic Finland fiscal deficits Fiscal Policy Fourth Republic France Gaulle GDP growth rate GDP ratio Germany government revenues growth slowdown industrial countries inflation rates intertemporal Ireland Italy Japan Jeffrey Sachs large budget deficits large deficits macroeconomic multi-party coalition governments National Bureau NBER Netherlands Norway Nouriel Roubini Number Author Title OECD economies OECD National Income OECD NIA optimal tax parliamentary system path of taxes percent of GDP period policymakers political parties political variable presidential presidential system proportional representation public debt real interest rates regression result rise in unemployment seignorage Small Coalitions Table tax rates tax smoothing theory transitory U.S. Congress unemployment rate votes