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...

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Main Authors:	Munoz, Ercio, Olaberria, Eduardo
Format:	Working Paper
Language:	English
Published:	World Bank, Washington, DC 2019
Subjects:	FISCAL POLICY BUDGET RIGIDITY FISCAL ADJUSTMENT FISCAL CONSOLIDATION DEBT BURDEN PUBLIC WAGES
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

id	okr-10986-32209
recordtype	oai_dc
spelling	okr-10986-322092022-09-20T00:13:24Z Are Budget Rigidities a Source of Fiscal Distress and a Constraint for Fiscal Consolidation? Munoz, Ercio Olaberria, Eduardo FISCAL POLICY BUDGET RIGIDITY FISCAL ADJUSTMENT FISCAL CONSOLIDATION DEBT BURDEN PUBLIC WAGES 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. 2019-08-07T19:58:20Z 2019-08-07T19:58:20Z 2019-08 Working Paper 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 English Policy Research Working Paper;No. 8957 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English
topic	FISCAL POLICY BUDGET RIGIDITY FISCAL ADJUSTMENT FISCAL CONSOLIDATION DEBT BURDEN PUBLIC WAGES
spellingShingle	FISCAL POLICY BUDGET RIGIDITY FISCAL ADJUSTMENT FISCAL CONSOLIDATION DEBT BURDEN PUBLIC WAGES Munoz, Ercio Olaberria, Eduardo Are Budget Rigidities a Source of Fiscal Distress and a Constraint for Fiscal Consolidation?
relation	Policy Research Working Paper;No. 8957
description	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.
format	Working Paper
author	Munoz, Ercio Olaberria, Eduardo
author_facet	Munoz, Ercio Olaberria, Eduardo
author_sort	Munoz, Ercio
title	Are Budget Rigidities a Source of Fiscal Distress and a Constraint for Fiscal Consolidation?
title_short	Are Budget Rigidities a Source of Fiscal Distress and a Constraint for Fiscal Consolidation?
title_full	Are Budget Rigidities a Source of Fiscal Distress and a Constraint for Fiscal Consolidation?
title_fullStr	Are Budget Rigidities a Source of Fiscal Distress and a Constraint for Fiscal Consolidation?
title_full_unstemmed	Are Budget Rigidities a Source of Fiscal Distress and a Constraint for Fiscal Consolidation?
title_sort	are budget rigidities a source of fiscal distress and a constraint for fiscal consolidation?
publisher	World Bank, Washington, DC
publishDate	2019
url	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
_version_	1764476036580376576

Are Budget Rigidities a Source of Fiscal Distress and a Constraint for Fiscal Consolidation?

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