Institutions and Fiscal Policy Volatility

Over the last decades, persistent government budget deficits have led to a rapid accumulation of public debt in most developed countries. Part of this may be explained by the aggressive use of fiscal policy (excluding the stimulus measures employed to fight the most recent financial crisis). In fact, it turns out that fiscal policy is not conducted by benevolent governments, but rather by politically-motivated executives, who typically make use of discretion in the conduct of fiscal policy to maximise their chances for re-election. However, this harms the economy by increasing the volatility of public spending. In this context, what can be done to minimise this excessive volatility? Using a panel of 23 EU countries over the 1980¿2007 period, this book argues that the answer lies in the strengthening of fiscal institutions, so as to make governments more accountable. More checks and balances thus make it harder for governments to change fiscal policy for reasons unrelated to the current state of the economy. The findings contained in this book add to the Fiscal Institutions strand of literature, and should appeal, in particular, to those interested in political economy issues.