How Much is A Lot? Historical Evidence on the Size of Fiscal Adjustments

Abstract

The sizeable fiscal consolidation required to stabilize the debt-to-GDP ratios in several countries in the aftermath of the global crisis raises a crucial question on its feasibility. To answer this question, we rely on historical evidence from a sample of 91 adjustment episodes of countries during 1945–2012 that needed and wanted to adjust in order to stabilize debt to GDP. We find that, in at least half the cases, countries improved their cyclically adjusted primary balances by close to 5 percent of GDP. We also observe that, while countries typically make substantial efforts to stabilize debt, once this objective is achieved, they tend to ease their primary balances and do not necessarily get back to their initial lower debt-to-GDP ratio. We find that consolidations tended to be larger when the initial deficit was high and adjustment efforts were sustained over time. Fiscal adjustments also tended to be larger when accompanied by an easing of monetary conditions and, to a lesser extent, by an improvement in credit conditions. 1 We thank Carlo Cottarelli, Martine Guerguil, Benedict Clements, Agustin Roitman, and Serhan Cevik for helpful comments and discussions. We are also grateful to Nathaniel Arnold, Ozgur Demirkol, Daniel Leigh, and Nelson Sobrinho for important feedback; and to participants at the Fiscal Affairs Department seminar for their useful suggestions. Haoyu Wang provided excellent research assistance.