## Experience with Large Fiscal Adjustments

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### Key findings
- Large adjustments have occurred relatively frequently over the past 30 years.
- Some 300 episodes of consolidation in excess of 5 percent of GDP were identified over the past three decades, nearly half of which involved an adjustment over a relatively short time span of just one to two years.
- Sizable consolidations have been implemented under a range of circumstances, including during financial crises, as part of planned adjustments, and in connection with improved economic circumstances.
- Large adjustments have been undertaken by a diverse group of countries, including G-7 countries, EU member states, resource-rich countries, major emerging market countries, and numerous developing countries.
- Macroeconomic conditions at the outset of large fiscal adjustments were relatively difficult: countries that undertook large adjustments had significantly higher debt ratios and inflation at the outset, as well as more sluggish growth of GDP, private consumption, and investment, relative to countries that undertook small fiscal consolidations.
- The fiscal accounts of countries undertaking large adjustments showed greater reliance on relatively volatile grants and nontax revenues, less reliance on domestic indirect taxes, and more capital investment outlays in the run-up to the adjustment.

### Preconditions and context
- Restoring sustainability and ensuring access to short-term financing were pressing needs in many large-adjustment episodes.
- The structure of pre-adjustment budgets frequently reflected vulnerabilities (volatile revenue composition, higher capital spending) that contributed to the need for large adjustments.

### Design and components of successful adjustments
- Durable large fiscal adjustments relied primarily on expenditure reduction.
- Statistical and econometric analyses suggest that a balanced reduction of capital and current spending, with an emphasis on a durable lowering of the wage bill, worked best.
- A high interest burden proved relatively difficult to overcome and led to a lower incidence of success.
- Medium-term budgetary frameworks tangibly supported the adjustment by providing a road map and a benchmark when additional measures were needed.

### Revenue-based and gradual adjustments
- There were cases of durable fiscal adjustments based on revenue enhancement, particularly in countries with low initial revenue-to-GDP ratios and where the pace of adjustment was more gradual.
- A gradual pace allowed for sustained implementation over time of tax policy and administration reforms.

### Political and institutional factors
- High political risk had an adverse impact on the duration of adjustment.
- Case studies confirm that political support was a key element in sustained fiscal adjustments.
- IMF engagement is discussed in the study as part of the broader institutional context (case study findings referenced).

### Macroeconomic impact
- Large adjustments, in contrast with small consolidations, generally had a positive macroeconomic impact.
- Among large adjustments, a more gradual pace of implementation seems to have led to more favorable macroeconomic outcomes.

### Fiscal structural reforms and governance
- Greater transparency and improved monitoring of the fiscal stance helped focus attention on underlying policies at an early stage and generated stronger political support.
- Enhanced legal and institutional arrangements, as well as fiscal indicators such as the nonresource balance in oil-producing countries, played an important role.
- Countries with more advanced expenditure management systems faced a less arduous task when undertaking fiscal adjustments by being able to better track and control contingent liabilities and tax expenditures, and to improve debt management.

*Source: Experience with Large Fiscal Adjustments, Occasional Paper 246, International Monetary Fund*

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_Source: https://www.imf.org/-/media/websites/imf/imported-publications/external/pubs/nft/op/246/_op246.pdf_