## _wp07178

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### I. Introduction: purpose and methods
- Examines experience of industrial countries that undertook fiscal consolidation (FC), stabilized public finances, and substantially reduced debt without adverse effects on economic activity.
- Methodology:
  - Case studies (fourteen OECD fiscal adjustments during 1994–2005).
  - Cross-sectional econometric study (24 OECD countries, 1972–2006; three-year non-overlapping averages).
  - Model-based simulations using the Global Integrated Monetary and Fiscal Model (GIMF).

### II. Key findings on determinants and effects of fiscal consolidation
- General findings from case studies:
  - Budgetary difficulties tend to spur adjustment efforts.
  - Supportive domestic and international growth environments facilitate adjustment.
  - Fiscal adjustments relying on cuts in current expenditure have tended to be more durable than revenue-based consolidations.
  - Higher governmental stability and higher institutional quality are associated with more successful consolidations.
- Macroeconomic effects:
  - Adjustments tended to moderate growth in the short run; some consolidations were “expansionary.”
  - GIMF experiments: short-run contractionary effects are smallest when consolidation involves increases in consumption taxes, and largest when it involves cuts in productive public infrastructure spending.
  - Fiscal consolidation can have positive long-run effects when greater fiscal space after debt reduction is used to cut capital income taxes; long-run gains may not occur if consolidation involves cuts in public infrastructure spending.
  - Fiscal adjustment by a large economy, such as the United States, is found to have substantial positive spillover effects.

### III. Case study selection and episodes (summary)
- Identification criteria:
  - FC year: cyclically adjusted primary balance (CAPB) to cyclically-adjusted GDP improves by at least 1 percentage point.
  - Success index S based on debt-to-GDP change over the following three years:
    - S = 3 if debt-to-GDP falls by at least 5 percentage points.
    - S = 2 if debt-to-GDP stabilized within ½ percentage point of initial level or decreased by less than 5 percentage points.
    - S = 1 if debt increases by more than ½ percent of GDP.
- Sample: 24 OECD countries during 1990–2005.
- Fourteen case-study episodes (country — years): Canada — 1994–97; Denmark — 2004–05; Finland — 1998; Germany — 2003–05; France — 1996–97; Ireland — 2003–04; Italy — 1997; Japan — 2004; Netherlands — 2004–05; New Zealand — 2003; Spain — 1996–97; Sweden — 1994–98; United Kingdom — 1995–98; United States — 1994.
- Note: Germany’s adjustment included despite not meeting the one-year 1 percent CAPB threshold.

### IV. Adjustment composition and magnitudes (selected exact figures)
- Aggregate patterns:
  - Consolidations approximately equally split between revenue-based and expenditure-based adjustments; many episodes combined both.
  - Cuts in current expenditure generally more sustained; capital expenditure cuts common in some episodes.
- Country-specific numeric improvements in cyclically adjusted primary fiscal balance and composition:
  - Canada, 1994–97: CAPB improved by 6.6 percent of GDP; expenditure cuts accounted for about 85 percent of the improvement.
  - Denmark, 2004–05: CAPB improved by about 2.9 percent of GDP; expenditure restraint accounted for approximately half of the improvement.
  - Finland, 1998: CAPB improved by about 1.7 percent in 1998 (and by cumulative 10 percent of GDP over 1992–2000); expenditure cuts accounted for about 85 percent of the improvement.
  - France, 1996–97: CAPB improved by about 3 percent of GDP; revenue measures accounted for more than 85 percent of the improvement.
  - Germany, 2003–05: CAPB improved by about 0.6–1.6 percent of GDP (different estimates), mainly due to expenditure measures.
  - Ireland, 2003–04: CAPB improved by about 2.9 percent of GDP; revenue measures accounted for more than 90 percent of the improvement.
  - Italy, 1997: CAPB improved by about 2 percent in 1997 (and by cumulative 3.5 percent of GDP over 1994–97); revenues reached over 47.5 percent of GDP.
  - Japan, 2004: CAPB improved by about 1.3 percent of GDP in 2004 (and by another 0.2–0.8 percent in 2005 according to different estimates).
  - Netherlands, 2004–05: Structural deficit narrowed by about 2.3 percent of GDP; expenditure measures accounted for more than 75 percent of the improvement.
  - New Zealand, 2003: CAPB improved by about 1.4 percent of GDP in 2003 (and by cumulative 3.3 percent since 2000); expenditure restraint accounted for approximately 40 percent of the improvement.
  - Spain, 1996–97: CAPB improved by about 2.8 percent over 1996–97 (and by cumulative 4.1 percent of GDP since 1993); expenditure cuts accounted for about 60 percent of the improvement.
  - Sweden, 1994–98: CAPB improved by about 11 percent of GDP; expenditure cuts accounted for approximately 75 percent of the improvement.
  - United Kingdom, 1995–98: CAPB improved by 6.4 percent of GDP; expenditure restraint accounted for about 75 percent of the improvement.
  - United States, 1994: Multi-year adjustment with the structural deficit to improve by 2½ percentage points of GDP over the following three years.

### V. Subnational adjustments, coordination, and institutional reforms (selected exact measures)
- Subnational actions often crucial; mechanisms included numerical rules, cooperative targets, borrowing limits, and grant reassignments.
- Selected numeric subnational measures:
  - Canada, 1994–97: Cuts in provincial wage bill, capital spending, and transfers to municipalities totaling 1.7 percent of GDP in FY 1993/94; provincial fiscal improvements exemplified by Ontario and Quebec eliminating deficits (3 percent of provincial GDP).
  - Finland, 1994–95: Municipalities improved fiscal balances by 2.3 percent of GDP.
  - Netherlands, 2004–05: Local governments improved balances in 2004–05 under more explicit constraints.
  - United States, 1994: Adjustment carried out entirely at the federal government level.
- Institutional and structural reforms:
  - Introduction of medium-term budget frameworks and multiyear budgeting in several cases.
  - Structural reforms in health care, unemployment benefits, and pensions supported consolidations.
  - Reforms included shift to block transfers, corporate income tax base broadening, pension reform, and medium-term expenditure caps (country-specific implementations listed in source).

### VI. Cross-section empirical results — bivariate correlations (Table 7 exact values)
- Unconditional correlations of three-year average CAPB with selected variables (correlation coefficient (p-value)):
  - Public debt-to-GDP ratio: 0.326 (0.000)***
  - Domestic growth: 0.201 (0.005)***
  - Domestic output gap: -0.062 (0.403)
  - Trade partner growth: 0.189 (0.011)**
  - Trade partner output gap: -0.085 (0.247)
  - Inflation: -0.342 (0.000)***
  - Real interest rate: 0.046 (0.553)
  - Change in cyclically adjusted current expenditure: -0.510 (0.000)***
  - Change in cyclically adjusted revenue: 0.089 (0.233)
  - Governmental stability: 0.106 (0.193)
  - Institutional quality: 0.134 (0.100)
- Significance notation: values significant at the 1 percent level marked ***, at the 5 percent level marked **.

### VII. Cross-section multivariate regression results (selected exact coefficients and t-statistics)
- Estimation: panel regressions with country fixed effects; dependent variable three-year average CAPB; explanatory variables measured in initial year of three-year period.
- Core macroeconomic controls (Table A4, lagged debt coefficients by column):
  - Lagged debt coefficients: 0.050 [6.13]***; 0.059 [7.20]***; 0.059 [6.87]***; 0.066 [6.63]***; 0.071 [7.10]***.
  - Growth of PPP GDP per capita coefficients (selected): 0.235 [3.18]***; 0.225 [2.85]***; 0.156 [2.07]**; 0.140 [1.84]*.
  - Observations range: 187, 179, 172, 168, 162.
  - R-squared range: 0.19 to 0.39.
- Adding composition, political, and institutional factors (Table A5, selected coefficients):
  - Lagged debt coefficients: 0.041 [3.92]***; 0.071 [7.15]***; 0.078 [5.60]***; 0.076 [5.58]***.
  - Change in cyclically adjusted current expenditure: -1.096 [5.96]*** (in percentage points of CAGDP).
  - Change in cyclically adjusted revenue: 0.367 [2.20]** (in percentage points of CAGDP).
  - Governmental stability: 0.237 [1.70]*.
  - Institutional quality: 0.113 [2.60]**.
  - Observations: 162 and 127 in reported columns.
  - R-squared: 0.51, 0.41, 0.33, 0.35 in reported columns.
- Interpretation highlights:
  - Lagged public debt positively and significantly associated with subsequent fiscal effort: "A 10 percentage point improvement in the debt-to-GDP ratio is associated with a 0.5 to 0.7 percentage point improvement in the CAPB ratio." (textual quantified finding in source)
  - Composition matters: "The CAPB ratio has, on average, improved by 1.1 percentage points over the three years following a 1 percentage point reduction in cyclically adjusted current expenditure."

### VIII. GIMF model experiments: setup, calibration, and scenario results
- Model features:
  - IMF’s Global Integrated Monetary and Fiscal Model (GIMF): open-economy general equilibrium model with nominal and real rigidities, monetary policy reaction function, OLG and liquidity-constrained agents, payroll and capital income distortionary taxes, and productive public infrastructure enhancing private productivity.
- Calibration (selected exact parameters):
  - Elasticity of aggregate output with respect to public capital: 0.14.
  - Public investment share: 3 percent of GDP.
  - A 10 percent increase in public investment → long-run GDP increase of 1.4 percent.
  - Average annualized rate of return on public investment: about 3 percent over 50 years (net of depreciation).
  - Depreciation of public capital: 4 percent per year.
- Fiscal adjustment experiment design:
  - Target: permanent reduction in debt-to-GDP ratio of about 15 percentage points.
  - Implementation: reduce fiscal deficit by 2.5 percent of GDP in the first two years, then keep fiscal deficit 0.5 percentage points of GDP below original level.
  - Five instrument scenarios:
    - (a) increases in payroll taxes;
    - (b) increases in consumption taxes;
    - (c) increases in corporate income taxes;
    - (d) reductions in government purchases of goods and services;
    - (e) reductions in government purchases and cuts in productive government investment.
- Simulation results (qualitative and mechanistic findings from experiments):
  - Short run: near-term reduction in output in all scenarios.
    - Smallest contraction when consolidation relies on increases in consumption taxes.
    - Largest contraction when cuts affect productive public investment.
  - Monetary policy reaction: central bank lowers nominal interest rates in response to lower inflation, partially offsetting demand loss.
  - Heterogeneity: liquidity-constrained households experience sharper short-run consumption cuts.
  - Medium/long run:
    - Fiscal adjustment can yield substantial output gains if fiscal space used to cut distortionary taxes (notably capital income taxes).
    - Long-run gains are largest when tax cuts fall on capital income; payroll tax cuts stimulate labor supply.
    - Cuts in public investment can make long-run output gains negligible (example: a 10 percent cut in public investment undermines long-run gains).

### IX. Case-study evidence on macroeconomic dynamics after consolidation (selected outcomes)
- Many consolidations followed by robust growth; selected outcomes:
  - Canada, 1994–97: initial growth spurt, then two years of slower growth; sustained high growth with low inflation; improved current account; sharply reduced net foreign debt.
  - Denmark, 2004–05: activity picked up in 2005; unemployment reached a 30-year low.
  - Finland, 1998: strong sustained recovery; elimination of net external public debt by 2002.
  - France, 1996–97: activity picked up in 1998–2000; unemployment declined somewhat; public debt maintained below 60 percent of GDP.
  - Germany, 2003–05: activity picked up in 2006; VAT increase coming into effect in 2007.
  - Ireland, 2003–04: activity picked up in 2004–06; government maintained fiscal surpluses.
  - Spain, 1996–97: growth averaged 3.4 percent in 1996–2003; debt-to-GDP ratio decreased by 14 percentage points during 1996–2002.
  - Sweden, 1994–98: growth picked up in 1994–95; inflation moderated from over 4 percent to under 1 percent.
  - United Kingdom, 1995–98: activity strengthened through 2000.
  - United States, 1994: after slight slowdown in 1995, growth accelerated; unemployment declined; inflation stayed below 3 percent.
- Global factors:
  - Declining global interest rates often reduced debt service and reinforced consolidation, especially for high-debt countries (example: Italy).

### X. Determinants, trade-offs, and policy implications
- Determinants of successful consolidation:
  - Initiation typically during fiscal distress (high and rising public debt) and relatively weak activity.
  - Composition: current spending restraint associated with higher chances of success; tax-base-broadening revenue measures more effective than temporary/one-off tax surcharges.
  - Political and institutional: strong political leadership, higher governmental stability, and higher institutional quality improve prospects.
  - Subnational coordination and credible medium-term frameworks facilitate implementation.
- Policy-relevant trade-offs:
  - Composition matters for short- and long-run outcomes: cuts to productive public infrastructure undermine long-run gains.
  - Using fiscal space to reduce distortionary taxes, especially on capital income, can produce positive long-run output effects.
  - Consolidation in large economies can produce positive international spillovers through lower global interest rates.
- Research gaps identified:
  - Distributional effects of fiscal adjustments in the context of globalization and structural change.
  - Effects of simultaneous fiscal adjustments across many countries (e.g., aging or climate-driven adjustments).

### XI. Appendix I–II: methodology and tables (selected exact methodological points)
- FC definition: year with CAPB-to-GDP increase of at least 1 percentage point.
- Success index S: S = 3 if debt-to-GDP falls by ≥5 percentage points over three years; S = 2 if stabilized within ½ percentage point or decreased by <5 percentage points; S = 1 if debt increases by >½ percent of GDP.
- Cross-section empirical specification (Equation (1)):
  - capb_{i,t} = cyclically-adjusted primary balance to cyclically adjusted GDP.
  - Key regressor: d_{i,t-1} = public debt-to-GDP ratio at end of t-1.
  - Estimation uses three-year non-overlapping averages (periods listed: 1972–74, 75–77, 78–80, 81–83, 84–86, 87–89, 90–92, 93–95, 96–98, 1999–2001, 2003–05).
- Table A4 and Table A5 report coefficient estimates and t-statistics (see exact values in preceding sections).

*Source: Excerpt from _wp07178 (IMF staff analysis, case studies, cross-section econometric framework, and GIMF simulations).*

### References..............................................................................................................

### _wp07178 - References

### I. Introduction: purpose and methods
- Examines experience of industrial countries that undertook fiscal consolidation (FC), stabilized public finances, and substantially reduced debt without adverse effects on economic activity.
- Novelty: uses both case studies and econometric analysis, including model-based simulations using the Global Integrated Monetary and Fiscal Model (GIMF) developed at the IMF.
- Cross-sectional framework studies determinants of success and obstacles by examining:
  - economic conditions at the start of consolidation;
  - composition of expenditure and revenue measures;
  - role of accompanying structural reforms;
  - contribution of institutional factors;
  - government actions aimed at garnering public support.
- Empirical scope:
  - Cross-country econometric study complemented by fourteen case studies of OECD fiscal adjustments during the 1990s and 2000s.
  - Analysis of effects of fiscal consolidations on activity based on case studies and GIMF simulations.

### II. Key findings on determinants and effects of fiscal consolidation
- General findings from case studies:
  - Budgetary difficulties tend to spur adjustment efforts.
  - Supportive domestic and international growth environments facilitate adjustment.
  - Fiscal adjustments relying on cuts in current expenditure have tended to be more durable than revenue-based consolidations.
  - Higher governmental stability and higher institutional quality are associated with more successful consolidations.
- Macroeconomic effects:
  - Adjustments tended to moderate growth in the short run, but contractionary effects were not as pronounced as generally anticipated; some consolidations were “expansionary.”
  - GIMF experiments: short-run contractionary effects are smallest when consolidation involves increases in consumption taxes, and largest when it involves cuts in productive public infrastructure spending.
  - Fiscal consolidation can have positive long-run effects when greater fiscal space after debt reduction is used to cut capital income taxes; long-run gains may not occur if consolidation involves cuts in public infrastructure spending.
  - Fiscal adjustment by a large economy, such as the United States, is found to have substantial positive spillover effects.

### III. Identifying episodes and classification criteria
- Definition used for case study FC identification:
  - FC years are those in which the ratio of the cyclically adjusted primary balance (CAPB) to cyclically-adjusted GDP improves by at least 1 percentage point.
  - Success measured by debt reduction over the following three years:
    - “Very successful” if three years after start debt-to-GDP ratio is at least five percentage points below pre-FC level.
    - Other degrees (moderately successful, unsuccessful) defined in Appendix I.
- Sample coverage and data:
  - Fiscal adjustments identified among 24 OECD countries during 1990–2005.
  - To evaluate success of FCs during 2003–05, relies on forecasts of public debt for 2006–07 provided by the OECD (2006).
  - Full list of FC episodes and estimated/projected changes in CAPB and debt ratios are in Appendix Tables A1–A3.
- The 24 OECD countries considered: Australia, Austria, Belgium, Canada, Denmark, Germany, Finland, France, Greece, Ireland, Iceland, Italy, Japan, Korea, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, and the United States.

### IV. Case study selection and episodes
- Fourteen fiscal adjustments selected for case studies; include recent FC examples of each G-7 country and Germany since 2003, plus Denmark, Ireland, the Netherlands, New Zealand, Finland, Spain, and Sweden.
- All selected FCs occurred during the 1994–2005 period.
- Table 1: Fiscal Consolidation Episodes Used for Case Studies (Country — Years)
  - Canada — 1994–97
  - Denmark — 2004–05
  - Finland — 1998
  - Germany — 2003–05
  - France — 1996–97
  - Ireland — 2003–04
  - Italy — 1997
  - Japan — 2004
  - Netherlands — 2004–05
  - New Zealand — 2003
  - Spain — 1996–97
  - Sweden — 1994–98
  - United Kingdom — 1995–98
  - United States — 1994
- Note: Germany’s adjustment does not formally qualify as a consolidation episode under the paper’s threshold (no year with structural primary balance improvement exceeding 1 percent of GDP), but is included as a multiyear consolidation initiative.

### V. Potential determinants of fiscal consolidation success (literature synthesis)
- Economic and political background:
  - High and rising debt-to-GDP can spur effective FC; empirical evidence generally supportive.
  - Domestic economic conditions: mixed evidence on whether downturns or expansions increase likelihood/success of FC:
    - Some studies find reform more likely when “things are going badly.”
    - VHS (2001) find higher chance of success when domestic economy is in cyclical downturn.
    - Alesina and Perotti (1995) find probability of success lower when economy is in recession.
  - External conditions: no consensus whether favorable external environment aids success.
  - Monetary policy easing may help some FCs, but evidence is inconclusive.
- Political economy factors:
  - Coalition governments found less likely to succeed than single-party and minority governments in some studies.
  - Newly-elected governments and presidential systems with large party majorities may have higher likelihood of success.
  - Frequent government changes tend to be associated with larger fiscal deficits.
- Composition of adjustment:
  - Successful adjustments rely mostly on expenditure cuts; unsuccessful rely more on tax increases.
  - Within expenditure, successful adjustments characterized by cuts in transfers and wage bill; unsuccessful adjustments mainly cut government investment.
- Subcentral government involvement:
  - Involvement of subcentral tiers often crucial for achieving expenditure cuts, particularly on the government wage bill.
  - Central governments influence subcentral expenditure via grant allocations; control of grants affects overall success.
- Mobilizing public support strategies:
  - Use of independent fiscal agencies to assess unsustainability.
  - Explicit government fiscal objectives (e.g., “halving the deficit by year x”, “golden rule”).
  - Reference to external anchors (e.g., Maastricht criteria).
  - Packaging fiscal consolidation with structural reforms.
  - Promoting fiscal transparency to facilitate public monitoring.
- Institutional quality:
  - Higher-quality fiscal institutions associated with greater expenditure discipline even after political pressures controlled for.
  - Strong and impartial bureaucracies and high democratic accountability linked to better fiscal policy performance.
  - Higher fiscal transparency associated with lower public debt and deficits.

### VI. Case study insights: political, macroeconomic, and fiscal background (summary)
- Political timing:
  - About three quarters of surveyed fiscal adjustments were initiated by newly-elected governments.
  - Explanations: mandate for adjustment, new approaches, ability to develop medium-term strategy, lower political cost early in term.
- Macroeconomic timing:
  - Most consolidations were launched during downturns or early recovery stages; less than a quarter of the fourteen episodes started with a strong economic outlook (exceptions: U.K., New Zealand, and to a lesser extent Spain).
- Fiscal preconditions:
  - Consolidations typically preceded by sharp deterioration in government fiscal balances and rapid increases in public debt.
  - Exceptions where consolidation was motivated by long-term outlook (Denmark, New Zealand) or early arresting of budget deterioration (Ireland).

### VII. Illustrative country background snapshots (from Table 2)
- Canada, 1994–97:
  - Political: Majority federal government elected in 1993; similar results in provinces.
  - Macro: Recovery from recession; low inflation; high output gap and unemployment; exchange rate depreciation.
  - Fiscal: Sizable deficit and debt; large share of debt short term and held by nonresidents; high tax-to-GDP ratio; expanding entitlements; sub-federal fiscal issues.
- Denmark, 2004–05:
  - Political: Ruling center-right coalition with diminishing voter support.
  - Macro: Continued economic slowdown since 2001; gradually rising unemployment.
  - Fiscal: Moderate public debt (of about 50 percent of GDP); near-balanced budget.
- Finland, 1998:
  - Political: Coalitions with clear EMU-membership mandate.
  - Macro: Gradual consolidation from 1992 after deep recession; by 1998 growth well above EU average.
  - Fiscal: High deficit and medium-level but rapidly increasing debt; high tax-to-GDP ratio and expanding entitlement programs.
- France, 1996–97:
  - Political: President brought forward parliamentary elections to secure mandate for consolidation and to avoid interference with EMU meeting.
  - Macro: Launched amid slow recovery from recession; relatively high unemployment; low inflation.
  - Fiscal: Large fiscal deficit and rising public debt, falling short of EMU criteria.
- Germany, 2003–05:
  - Political: Narrow election win for SPD-led coalition in September 2002; Agenda 2010 unveiled in March 2003.
  - Macro: Three years of static output, high unemployment, deflation concerns, financial sector losses.
  - Fiscal: Fiscal deficit widened to about 3.7 percent of GDP in 2002; public debt around 60 percent of GDP.
- Ireland, 2003–04:
  - Political: Coalition with strong parliamentary majority since 2002.
  - Macro: After decade of strong growth, activity (excluding multinationals’ profits) decelerated in 2002 and remained subdued in 2003.
  - Fiscal: Relatively low public debt (below 35 percent of GDP); near-balanced budget; relatively low tax-to-GDP ratio.
- Italy, 1997:
  - Political: Electoral reforms led to more stable governments with longer horizons.
  - Macro: Consolidation launched as growth turned negative in late 1996–early 1997; inflation declining; high unemployment.
  - Fiscal: Very high debt (of over 115 percent of GDP in 1997), rising despite consolidation attempts.
- Japan, 2004:
  - (Table 2 truncated in source content; Japan entry incomplete in provided text.)

*Source: Excerpt from _wp07178 (IMF staff analysis, case studies, and cross-section econometric framework).*

### 000. In 2004, the positions of the

### _wp07178 - 000. In 2004, the positions of the

### Political context and approval ratings
- In 2004, the positions of the ruling party in both houses of parliament shrank as the government's approval rating hit the low of 36 percent (compared to 70–90 percent in 2001), partly due to the passage of pension reforms.

### Macroeconomic background and labor market
- Gradual economic recovery since mid-2002, with contributions from both exports and domestic demand.
- Characterized by gradually declining unemployment and easing of deflation.

### Fiscal position and public debt
- A decade of high fiscal deficits (about 8 percent of GDP in 2003) led to a rapid accumulation of public debt, which reached 160 percent of GDP.
- The revenue-to-GDP ratio remained below 30 percent, while social security outlays kept rising.

### Recent fiscal consolidation episodes (selected country snapshots)
- Netherlands, 2004–05
  - Early elections January 2003; center-right coalition took office.
  - Growth averaged barely 0.2 percent over two years since 2000; growth projected at about 1 percent in 2004 and 1¾ percent in 2005.
  - The 3 percent Maastricht deficit ceiling was breached in 2003; general government balance worsened by almost 5½ percentage points during the first three years of the decade.
- New Zealand, 2003
  - Competitive political environment; opposition called for tax cuts and improved health and education services.
  - Solid and accelerating economic growth, narrowing current account deficit, unemployment at a 16-year low.
  - Slight budget surplus and public debt about 40 percent of GDP (above government's long-term target of 30 percent of GDP).
- Spain, 1996–97
  - Coalition government elected March 1996 with mandate for fiscal consolidation.
  - Rapid recovery since 1993 recession; persistent high unemployment above 20 percent.
  - Fiscal deficit exceeded 7 percent of GDP in 1995; public debt rose to over 70 percent of GDP.
- Sweden, 1994–98
  - Social Democrat minority government launched consolidation after 1994 elections.
  - Deep recession, high inflation, rapidly rising unemployment; fiscal deficit exploded to over 12 percent of GDP; public debt reached 80 percent of GDP.
- United Kingdom, 1995–98
  - Labour won May 1997 with overwhelming majority; confirmed course of fiscal consolidation.
  - Three successive years of solid growth led by private consumption; unemployment falling.
  - Public sector fiscal deficit increased to over 7 percent of GDP by 1994; debt-to-GDP ratio exceeded target of 40 percent by about 8 percentage points.
- United States, 1994
  - New Democratic President took over in January 2003 (text context).
  - Economic activity weak, unemployment rising.
  - Federal deficit almost 5 percent of GDP; federal debt had quadrupled over 1980–92 and debt ratio projected to continue rising.

### Adjustment basis: revenue vs expenditure and patterns of consolidation
- Fiscal consolidations were approximately equally split between revenue-based and expenditure-based adjustments, with many episodes combining both types of measures.
- Expenditure-side patterns:
  - Several adjustments relied substantially on capital expenditure cuts (examples: France, Italy, Ireland).
  - Across-the-board sequestration of discretionary spending programs occurred in Sweden, Finland, and Japan.
  - Cuts in current expenditure were more sustained on average, often accompanied by structural reforms (examples: Canada, Finland, Spain, Netherlands).
  - Reduction in wage bill and social security spending (including social transfers, health care, and unemployment benefits) made important contributions to adjustment.
- Revenue-side patterns:
  - Revenue measures ranged from one-off tax surcharges to major overhauls of tax systems.
  - Successful revenue-based adjustments tended to rely significantly on tax base broadening (example: Spain).
  - Tax reforms simplifying the system and reducing burden on small and medium-sized businesses increased tax buoyancy in some cases.
- Timing and duration:
  - Successful fiscal adjustments were often gradual, spanning up to a decade (examples: Finland, Sweden, Spain).
  - Importance of anchoring policy objectives within a medium-term framework with credible commitment to chosen strategies.
  - Lags exist between adoption of core structural reforms (particularly in social welfare) and their full impact.

### Evidence from country-specific adjustment bases and magnitudes (selected exact figures)
- Canada, 1994–97
  - Cyclically adjusted primary fiscal balance improved by 6.6 percent of GDP over 1994–97; expenditure cuts accounted for about 85 percent of the improvement.
- Denmark, 2004–05
  - Cyclically adjusted primary fiscal balance improved by about 2.9 percent of GDP over 2004–05; expenditure restraint accounted for approximately half of the improvement.
- Finland, 1998
  - Cyclically adjusted primary fiscal balance improved by about 1.7 percent in 1998 (and by cumulative 10 percent of GDP over 1992–2000); expenditure cuts accounted for about 85 percent of the improvement.
- France, 1996–97
  - Cyclically adjusted primary fiscal balance improved by about 3 percent of GDP over 1996–97; revenue measures accounted for more than 85 percent of the improvement.
- Germany, 2003–05
  - Cyclically adjusted primary fiscal balance improved by about 0.6–1.6 percent of GDP over 2003–05 (according to different estimates), mainly as a result of expenditure measures.
- Ireland, 2003–04
  - Cyclically adjusted primary fiscal balance improved by about 2.9 percent of GDP over 2003–04; revenue measures accounted for more than 90 percent of the improvement.
- Italy, 1997
  - Cyclically adjusted primary fiscal balance improved by about 2 percent in 1997 (and by cumulative 3.5 percent of GDP over 1994–97).
  - Revenues reached the record high of over 47.5 percent of GDP (following temporary and permanent measures).
- Japan, 2004
  - Cyclically adjusted primary fiscal balance improved by about 1.3 percent of GDP in 2004 (and by another 0.2–0.8 percent (according to different estimates) in 2005).
- Netherlands, 2004–05
  - Structural deficit narrowed by about 2.3 percent of GDP over 2004–05; expenditure measures accounted for more than 75 percent of the improvement.
- New Zealand, 2003
  - Cyclically adjusted primary fiscal balance improved by about 1.4 percent of GDP in 2003 (and by cumulative 3.3 percent since 2000); expenditure restraint accounted for approximately 40 percent of the improvement.
- Spain, 1996–97
  - Cyclically adjusted primary fiscal balance improved by about 2.8 percent over 1996–97 (and by cumulative 4.1 percent of GDP since 1993); expenditure cuts accounted for about 60 percent of the improvement.
- Sweden, 1994–98
  - Cyclically adjusted primary fiscal balance improved by about 11 percent of GDP over 1994–98; expenditure cuts accounted for approximately 75 percent of the improvement.
- United Kingdom, 1995–98
  - Cyclically adjusted primary fiscal balance improved by 6.4 percent of GDP over 1995–98; expenditure restraint accounted for about 75 percent of the improvement.
- United States, 1994
  - Multi-year adjustment with the structural deficit to improve by 2½ percentage points of GDP over the following three years.

### Subnational adjustments and intergovernmental coordination
- Several consolidation episodes included new mechanisms for policy coordination across tiers of government; subnational actions often part of adjustments.
- Approaches:
  - Imposition of numerical rules on local/regional authorities (Netherlands, Sweden in 2000).
  - Cooperative negotiated fiscal targets between central and subnational governments (Denmark, Spain).
  - Enforcement sometimes relied on moral suasion and peer pressure (Spain).
  - Tight administrative controls already in place in U.K. and Ireland.
- Clarification of expenditure responsibilities and revenue assignments aided consolidation in several countries by alleviating soft budget constraints and increasing political accountability (examples: Italy, Japan).
- Selected subnational actions (exact figures and measures):
  - Canada, 1994–97: Cuts in provincial wage bill, capital spending, and transfers to municipalities totaling 1.7 percent of GDP in FY 1993/94; provinces raised education and health fees and excises and broadened corporate income tax base; Ontario and Quebec eliminated deficits in the late 1990s (3 percent of provincial GDP).
  - Denmark, 2004–05: Counties legally bound to comply with budget targets negotiated with central government; broader reform reducing number of municipalities to come into force in 2007.
  - Finland, 1998: Reduction in transfers to municipalities; municipalities improved fiscal balances by 2.3 percent of GDP in 1994–95.
  - Netherlands, 2004–05: More explicit constraints on local government operations, including borrowing limits; local governments improved their balances in 2004–05.
  - United States, 1994: Adjustment carried out entirely at the federal government level.

### Structural reforms supporting consolidation
- Introduction of medium-term budget frameworks in several cases helped put consolidation into perspective and facilitate adoption of other structural reforms.
- Multiyear budgeting and incorporation of long-term fiscal sustainability analysis were notable advances.
- Structural reforms in health care, unemployment benefits, and pensions supported consolidations by raising efficiency and reducing public service costs and by improving work incentives.
- Institutional development from earlier consolidations (examples: Denmark, New Zealand) facilitated later efforts, creating a virtuous circle of enhanced fiscal discipline and higher government efficiency.

*Source: IMF staff reports and country authorities as presented in the provided content.*

### Introduction of medium-term budget framework; shift to block transfers; corporate income tax and personal income

### Introduction of medium-term budget framework; shift to block transfers; corporate income tax and personal income

### Country reform episodes and major measures
- Canada, 1994–97: (summary listing not provided in source excerpt).
- Denmark, 2004–05: Since 2001 fiscal policy guided by medium-term objectives based on the "Plan 2010" framework; reform of intergovernmental relationships.
- Finland, 1998: Introduction of medium-term budget framework, shift to block transfers, tax reform aimed at broadening the tax base and reducing tax rates, pension reform.
- France, 1996–97: Health care reform (including giving the Parliament a constitutional mandate to set social security spending ceilings), tax reforms aimed at broadening tax base.
- Germany, 2003–05: Pension reform (2004, with a delayed effect); health care reform (2004); unemployment benefit reform.
- Ireland, 2003–04: Introduction of rolling multi-year capital expenditure budgeting (previously used only for transport); preparation of long-term fiscal projections.
- Italy, 1997: Pension reform (1992–97); reform of budget structure aimed at enhanced transparency (1997); strengthened tax administration.
- Japan, 2004: Pension reform (2004, with a delayed effect); health care reform (2006); revision of revenue assignments and expenditure responsibilities of local governments.
- Netherlands, 2004–05: Changes to the expenditure-based framework to avoid the use of cyclical revenue windfalls to fund permanent spending increases; use of medium-term expenditure caps.
- New Zealand, 2003: Earlier reforms of the 1990s established a strong institutional framework for medium-term budgeting with incorporation of long-term projections of pension and social welfare spending; 2003 increase in fiscal surplus largely reflected unexpectedly strong revenues from past reforms during an upswing in the economic cycle.
- Spain, 1996–97: Gradual improvements in budgeting and monitoring later enshrined in the Fiscal Stability Law (2003); privatization and reorganization of public enterprises; strengthened tax administration.
- Sweden, 1994–98: Reform of unemployment benefits with emphasis shifting from cash payments to training; revision of the transfer allocation to municipalities.
- United Kingdom, 1995–98: Reform of unemployment benefits, including institution of "welfare to work" scheme to reduce youth unemployment.
- United States, 1994: Consolidation accompanied by intensive discussions regarding health care reform and NAFTA; strong executive leadership in emphasizing need to reduce the deficit; deficit package passed by extremely narrow congressional votes.

### Mobilization of popular support: strategies and political context (Table 6 synthesis)
- Articulation of a broad medium-term economic strategy and the role of fiscal discipline helped mobilize popular support (notably in European countries during the 1990s driven by EMU membership objectives).
- Political leadership critical to ensure continuity of consolidation policies; examples include the U.S. and Japan where leadership helped sustain politically costly consolidations.
- Adoption of fiscal rules alone is generally insufficient for sustained adjustment; however, fiscal rules developed during consolidations signaled policy commitment and helped sustain efforts, often becoming permanent legislation (example: Spain).
- Country-specific political notes:
  - Denmark: success of 1990s consolidation helped build nationwide consensus for prudent fiscal policies.
  - Finland, Italy, Spain: public consensus emerged that consolidation was necessary to achieve EMU membership.
  - France: partial consensus, but pension and rail reforms provoked protracted strikes in late 1995.
  - Germany: multi-year reform agenda identified in March 2003 to restore labor markets, public finances, and welfare by 2010 amid widespread criticism.
  - Ireland: partial public support with strong trade union opposition; government reshuffle in September 2004 revitalized reform agenda.
  - Japan: voter support limited but pension reforms passed despite strong popular resistance.
  - Netherlands: government commitment to comply with the 3 percent deficit limit; medium-term fiscal framework and CPB played a key role in consensus-building.
  - New Zealand: government emphasized commitment to medium-term budgeting principles and need for higher savings given future pension and health care obligations.
  - Sweden: Maastricht criteria helped justify consolidation despite unpopularity; September 1998 elections produced substantial losses for the Social Democrats.
  - United Kingdom: population desire for change; new Chancellor in May 1997 committed to the golden rule and deficit reduction while implementing tax reform to encourage investment.
  - United States: President led deficit reduction messaging; deficit package passed narrowly; continued fiscal discipline despite political shifts and budget crises.

### Cross-section analysis: approach and variables
- Sample and period: OECD countries over 1972–2006; analysis examines the correlation between the average fiscal policy stance over three years (measured by the average CAPB) and five sets of variables:
  1. public debt at the beginning of the first year;
  2. domestic economic activity at the start of the three-year period;
  3. trading-partner economic activity at the start of the three-year period;
  4. the level of inflation and the stance of monetary policy in the first year;
  5. political and institutional factors.
- Methodology: Subsection A presents bivariate relationships; Subsection B evaluates conditional relationships using multivariate panel regressions. Data sources: OECD Economic Outlook (2006) database.

### A. Bivariate relationships: key correlations and implications
- Primary balances are, in general, positively correlated with the public debt-to-GDP ratio: "The higher the public debt level, the tighter the cyclically adjusted fiscal stance over the subsequent three years."
- Positive relationship between cyclically-adjusted primary surpluses and per capita real GDP growth: "initiating and sustaining a deliberate fiscal consolidation is easier during periods of high growth."
- Unconditional correlation of the CAPB with the output gap is not statistically significant.
- Negative and statistically significant correlation between the CAPB and inflation: relatively tight fiscal policies are associated with a low-inflation environment.
- Relationship between average CAPB and the real interest rate in the first year is weak and not statistically significant.
- Cuts in current expenditure are correlated with a strong and statistically significant subsequent improvement in primary balances.
- Correlation between increases in cyclically-adjusted revenues and subsequent average fiscal surpluses is positive but of substantially smaller magnitude and not statistically significant.
- Positive relationships observed between governmental stability and fiscal policy effort, and between institutional quality and the capacity to maintain a tight fiscal policy stance.

Key numerical correlations from Table 7 (unconditional correlations; p-values in parentheses):
- Public debt-to-GDP ratio: 0.326 (0.000)***
- Domestic growth: 0.201 (0.005)***
- Domestic output gap: -0.062 (0.403)
- Trade partner growth: 0.189 (0.011)**
- Trade partner output gap: -0.085 (0.247)
- Inflation: -0.342 (0.000)***
- Real interest rate: 0.046 (0.553)
- Change in cyclically adjusted current expenditure: -0.510 (0.000)***
- Change in cyclically adjusted revenue: 0.089 (0.233)
- Governmental stability: 0.106 (0.193)
- Institutional quality: 0.134 (0.100)
- Note: Values significant at the 1 percent level are marked with ***; at the 5 percent level, with **.

### B. Multivariate analysis: determinants of fiscal policy effort
- Dependent variable: three-year average of the CAPB; panel regression framework.
- Lagged debt: significantly positively associated with subsequent fiscal effort.
  - Quantified finding: "A 10 percentage point improvement in the debt-to-GDP ratio is associated with a 0.5 to 0.7 percentage point improvement in the CAPB ratio."
- Composition of adjustment:
  - Countries that implement cuts in current expenditure tend to succeed in maintaining a tight fiscal policy stance.
  - Quantified finding: "The CAPB ratio has, on average, improved by 1.1 percentage points over the three years following a 1 percentage point reduction in cyclically adjusted current expenditure."
  - In contrast, a 1 percentage point increase in cyclically adjusted revenue is correlated with only (text truncated in source excerpt; reported effect is substantially smaller and not statistically significant in bivariate analysis).

*Sources: Country authorities, OECD, Economist Intelligence Unit, and IMF staff reports.*

### 0.4 percentage point improvement in the average CAPB over the following three years.

### _wp07178 - 0.4 percentage point improvement in the average CAPB over the following three years.

### Macroeconomic channels and prior literature
- Short-term fiscal multipliers are not always positive; theory and empirical work show that reductions in fiscal deficits can be partly or more than offset by increases in private domestic demand via lower risk premiums and changed expectations.
- Historical episodes (e.g., Ireland and Denmark in the 1980s) motivated the hypothesis that strong fiscal consolidations can be associated with negative fiscal multipliers (i.e., consolidations followed by growth).
- Fiscal adjustments in large economies may produce positive spillovers for other economies.

### GIMF model setup and calibration
- Model: IMF’s Global Integrated Monetary and Fiscal Model (GIMF), an open-economy general equilibrium model with nominal and real rigidities, monetary policy reaction function, multiple non-Ricardian features, and a fiscal policy reaction function.
- Non-Ricardian features: overlapping generations agents (OLG) with finite lifetimes; life-cycle labor productivity declines with age; liquidity constrained consumers (LIQ); payroll and capital income distortionary taxes.
- Productive public infrastructure: GIMF allows public investment to add to public capital stock and enhance private productivity.
- Calibration specifics:
  - Elasticity of aggregate output with respect to public capital set at 0.14.
  - A 10 percent increase in public investment is associated with a long-run increase in GDP of 1.4 percent.
  - Public investment represents 3 percent of GDP.
  - Average annualized rate of return on public investment of about 3 percent over 50 years (net of depreciation).
  - Depreciation of public capital set at 4 percent per year.

### Fiscal adjustment experiments (design)
- Target: permanent reduction in the debt-to-GDP ratio of about 15 percentage points.
- Implementation: reduce the fiscal deficit by 2.5 percent of GDP in the first two years, then keep fiscal deficit 0.5 percentage points of GDP below the original level.
- Five scenarios differ by adjustment instrument:
  - (a) increases in payroll taxes;
  - (b) increases in consumption taxes;
  - (c) increases in corporate income taxes;
  - (d) reductions in government purchases of goods and services;
  - (e) reductions in government purchases and cuts in productive government investment.
- To stabilize public debt at lower level, lower interest costs are used to reduce initial tax increases (scenarios a–c) or undo part of expenditure reductions (scenarios d–e).
- Results are reported as deviations from a baseline steady state.

### GIMF simulation results — short run and long run
- Short-run:
  - Fiscal tightening induces a near-term reduction in output in all scenarios.
  - The smallest contractionary effect arises when the consolidation relies on cuts in consumption taxes.
  - Cuts in productive government investment induce a much sharper short-run negative impact on economic activity.
  - Monetary stimulus partially offsets aggregate demand loss: central bank lowers nominal interest rates (reducing real rates) in response to lower inflation.
  - Households smooth consumption, mitigating contraction, but credit-constrained households experience sharp consumption cuts in the short run.
- Medium to long run:
  - Fiscal adjustment can yield substantial output gains when the fiscal space created by lower debt and interest costs is used to cut distortionary taxes.
  - Long-run cut in payroll taxes stimulates output by encouraging labor supply.
  - Largest supply-side gains occur when long-run tax cuts fall on capital income.
  - In a large economy (e.g., the United States), greater government savings raise the supply of loanable funds, lowering the real interest rate and crowding in private activity domestically and abroad.
  - If consolidation involves cuts in public investment, long-run output gains may not occur; example: a 10-percent cut in public investment makes long-run output gains negligible.

### Case-study evidence
- In most surveyed cases fiscal consolidations were followed by periods of robust economic growth; some exceptions and variable dynamics noted:
  - Canada, 1994–97: Initial growth spurt, then two years of slower growth during adjustment; sustained high growth followed with low inflation; improved current account; sharply reduced net foreign debt.
  - Denmark, 2004–05: Activity picked up markedly in 2005; unemployment reached a 30-year low; slight deceleration projected in 2006–07; government relaxed caps on welfare spending.
  - Finland, 1998: Strong sustained recovery since 1994; elimination of net external public debt by 2002.
  - France, 1996–97: Activity picked up in 1998–2000; unemployment declined somewhat; public debt maintained below the 60 percent of GDP threshold.
  - Germany, 2003–05: Activity picked up in 2006; VAT increase coming into effect in 2007.
  - Ireland, 2003–04: Activity picked up in 2004–06; government maintained fiscal surpluses.
  - Italy, 1997: Slow domestic-demand-driven recovery since Q2 1997 with growth not exceeding 2 percent; deterioration of the current account and increase in public external debt while total public debt declined somewhat.
  - Japan, 2004: Expansion strengthened; deflation ended; unemployment declined to an eight-year low; authorities intend consolidation aiming at achieving a primary balance (excluding social security) by 2011.
  - Netherlands, 2004–05: Mild recovery since mid-2005; fiscal deficit reduced to 2.3 percent in 2004 and further to 0.3 percent of GDP in 2005.
  - New Zealand, 2003: After strong activity, growth decelerated and current account widened to 9 percent; inflation picked up; budget continued running high surpluses.
  - Spain, 1996–97: Activity picked up; growth averaged 3.4 percent in 1996–2003; debt-to-GDP ratio decreasing by 14 percentage points between over 1996–2002.
  - Sweden, 1994–98: Growth picked up in 1994–95; inflation moderated from over 4 percent to under 1 percent.
  - United Kingdom, 1995–98: Activity strengthened through 2000; neutral budget combined with marked relaxation of monetary policy.
  - United States, 1994: After slight slowdown in 1995, growth accelerated; unemployment declined; inflation stayed below 3 percent.
- Many consolidations were accompanied by declining global interest rates, which reduced debt service expenditure and reinforced consolidation efforts, especially important for high-debt countries such as Italy.

### Determinants and policy implications
- Empirical analysis (cross-country econometrics for 24 countries and case studies) highlights:
  - Fiscal consolidations tend to be initiated during fiscal distress (high and rising public debt) and relatively weak economic activity.
  - Consolidations based on current spending restraint generally have higher chances of succeeding.
  - Strong political leadership and high institutional quality support successful consolidation; frequent changes of government and poor institutions are associated with higher fiscal deficits.
- Policy-relevant trade-offs:
  - Composition matters: consolidation via cuts to productive public infrastructure can undermine long-run gains.
  - Using fiscal space after debt reduction to cut distortionary taxes (especially on capital income) can generate positive long-run output effects.
  - Consolidation in large economies can produce positive international spillovers through lower global interest rates.
- Areas for further research:
  - Distributional effects of fiscal adjustments in the context of globalization and structural change.
  - Effects of simultaneous fiscal adjustments across many countries (e.g., driven by aging or climate change) and their global macroeconomic implications.

*Source: _wp07178 - 0.4 percentage point improvement in the average CAPB over the following three years.*

### REFERENCES

### REFERENCES

### Key referenced studies
- Lists empirical and theoretical literature on fiscal adjustments, fiscal institutions, and macroeconomic policy, including works by Abiad and Baig (2005); Alesina, Ardagna, Trebbi (2006); Alesina and Perotti (1995); Alesina and Tabellini (1990); Alt and Lassen (2006); Darby, Muscatelli, and Roy (2005); Drazen and Grilli (1993); Fabrizio and Mody (2006); Giavazzi, Japellini, and Pagano (2000); Giorno et al. (1995); Girouard and André (2005); Gleich (2003); Hauptmeier, Heipertz, and Schuknecht (2006); IMF (2003); Kumhof and Laxton (2007); Kumhof, Laxton, and Muir (2005); Lambertini and Tavares (2005); Ligthart and Suarez (2005); McDermott and Wescott (1996); OECD (2006); Tabellini (1986); Tsibouris et al. (2006); Tytell and Wei (2004); Von Hagen and Strauch (2001); Yläoutinen (2004).

### Appendix I — Threshold approach to identifying fiscal consolidation success
- Definition of a fiscal consolidation attempt (FC):
  - A year in which the cyclically-adjusted primary balance-to-GDP ratio increases by at least 1 percentage point.
- Success index (S) based on debt reduction over the following three years:
  - S = 3 if the debt-to-GDP ratio falls by at least 5 percentage points in the three years following a FC.
  - S = 2 if the debt-to-GDP ratio is stabilized within ½ of a percentage point of the initial level or if it decreases by less than 5 percentage points.
  - S = 1 if the debt increases by more than ½ percent of GDP.
- Tables A1–A3 report the values of the index for 1990–2005:
  - Table A1: Fiscal Consolidations with Highest Success (S = 3), 1990–2005 — examples include entries with ΔCAPB(T), ΔOB(T), ΔDebt(T+2), Debt(T-1) such as Australia 1997 ΔCAPB(T) 1.0 ΔOB(T) 1.7 ΔDebt(T+2) -10.4 Debt(T-1) 39.1 and others.
  - Table A2: Fiscal Consolidations with Moderate Success (S = 2), 1990–2005 — contains entries with ΔCAPB(T) values such as Australia 1994 1.4, Australia 2002 1.2, Austria 1996 1.8, etc.
  - Table A3: Fiscal Consolidations with Low Success (S = 1), 1990–2005 — contains entries with ΔCAPB(T) values and notable large debt increases, e.g., Greece 1991 ΔCAPB(T) 4.0 ΔDebt(T+2) 20.1 Debt(T-1) 93.6.
- Source for the tables: OECD.

### Appendix II — Cross-section methodology, data, and results
- Empirical specification (Equation (1)):
  - Dependent variable: capb_{i,t} = cyclically-adjusted primary balance to cyclically adjusted GDP for country i and year t.
  - Key regressors: d_{i,t-1} = public debt-to-GDP ratio at end of period t-1; country-specific intercept α_i; additional controls X_{j,i,t}.
  - Interpretation: coefficient ρ measures response of CAPB to deviations of public debt from implicit target; Σ_{j=1..J} β_j X_{j,i,t} captures response to other controls.
  - Estimation uses three-year non-overlapping averages of CAPB as dependent variable (three-year periods: 1972–74, 75–77, 78–80, 81–83, 84–86, 87–89, 90–92, 93–95, 96–98, 1999–2001, and 2003–05). Each RHS variable measured in the initial year of each three-year period.
- Data and sample:
  - Annual data sample covering 1972–2005 and 24 OECD countries.
  - Data sources: OECD (2006) Economic Outlook and International Country Risk Guide (2006).

- Table A4 — Estimation results: Core macroeconomic controls (three-year non-overlapping averages, in percent of CAGDP)
  - Lagged debt coefficients by column: 0.050, 0.059, 0.059, 0.066, 0.071 with corresponding t-statistics [6.13]***, [7.20]***, [6.87]***, [6.63]***, [7.10]***.
  - Growth of PPP GDP per capita coefficients: 0.235, 0.225, 0.156, 0.140 with t-statistics [3.18]***, [2.85]***, [2.07]**, [1.84]*.
  - Output gap coefficients: 0.023, 0.029, 0.057 with t-statistics [0.31], [0.42], [0.79].
  - Log of inflation coefficients: -0.238, -0.040 with t-statistics [1.08], [0.17].
  - Real interest rate coefficient: -0.053 with t-statistic [0.81].
  - Observations per column: 187, 179, 172, 168, 162.
  - Number of ifs code: 23, 23, 22, 22, 22.
  - R-squared by column: 0.19, 0.29, 0.29, 0.38, 0.39.
  - Notes: Absolute t-statistics in parentheses. Significance: *** 1 percent; ** 5 percent; * 10 percent. All equations estimated with country fixed effects.

- Table A5 — Estimation results: Adding composition, political, and institutional factors (three-year non-overlapping averages, in percent of CAGDP)
  - Lagged debt coefficients by column: 0.041, 0.071, 0.078, 0.076 with t-statistics [3.92]***, [7.15]***, [5.60]***, [5.58]***.
  - Growth of PPP GDP per capita coefficients: 0.046, 0.123, 0.067, 0.061 with t-statistics [0.66], [1.63], [0.70], [0.68].
  - Output gap coefficients: 0.144, 0.052, 0.029, 0.043 with t-statistics [2.19]**, [0.73], [0.36], [0.57].
  - Log of inflation coefficients: -0.099, -0.051, 0.105, 0.029 with t-statistics [0.48], [0.22], [0.38], [0.11].
  - Real interest rate coefficients: 0.040, -0.090, -0.018, -0.059 with t-statistics [0.66], [1.34], [0.21], [0.73].
  - Change in cyclically adjusted current expenditure coefficient: -1.096 with t-statistic [5.96]*** (in percentage points of CAGDP).
  - Change in cyclically adjusted revenue coefficient: 0.367 with t-statistic [2.20]** (in percentage points of CAGDP).
  - Governmental stability coefficient: 0.237 with t-statistic [1.70]*.
  - Institutional quality coefficient: 0.113 with t-statistic [2.60]**.
  - Observations by column: 162, 162, 127, 127.
  - Number of ifs code: 22, 22, 22, 22.
  - R-squared by column: 0.51, 0.41, 0.33, 0.35.
  - Notes: Absolute t-statistics in parentheses. Significance: *** 1 percent; ** 5 percent; * 10 percent. All equations estimated with country fixed effects.

*Source: _wp07178 - REFERENCES (APPENDICES I–II) — IMF PDF content provided.*

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