Working Paper: CEPR ID: DP10069
Authors: Barry Eichengreen; Ugo Panizza
Abstract: IMF forecasts and the EU?s Fiscal Compact foresee Europe?s heavily indebted countries running primary budget surpluses of as much as 5 percent of GDP for as long as 10 years in order to maintain debt sustainability and bring their debt/GDP ratios down to the Compact?s 60 percent target. We show that primary surpluses this large and persistent are rare. In an extensive sample of high- and middle-income countries there are just 3 (nonoverlapping) episodes where countries ran primary surpluses of at least 5 per cent of GDP for 10 years. Analyzing a less restrictive definition of persistent surplus episodes (primary surpluses averaging at least 3 percent of GDP for 5 years), we find that surplus episodes are more likely when growth is strong, when the current account of the balance of payments is in surplus (savings rates are high), when the debt-to-GDP ratio is high (heightening the urgency of fiscal adjustment), and when the governing party controls all houses of parliament or congress (its bargaining position is strong). Left wing governments, strikingly, are more likely to run large, persistent primary surpluses. In advanced countries, proportional representation electoral systems that give rise to encompassing coalitions are associated with surplus episodes. The point estimates do not provide much encouragement for the view that a country like Italy will be able to run a primary budget surplus as large and persistent as officially projected.
Keywords: debt sustainability; primary surpluses; fiscal policy; political economy
JEL Codes: E62; H63; H68
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strong economic growth (O51) | large primary surpluses (H62) |
| current account surpluses (F32) | primary surpluses (H62) |
| political factors (P16) | primary surpluses (H62) |
| left-wing governments (P26) | large primary surpluses (H62) |
| high debt-to-GDP ratio (H69) | fiscal adjustment urgency (E62) |
| fiscal adjustment urgency (E62) | primary surpluses (H62) |
| proportional representation electoral systems (C35) | surplus episodes (Y60) |