Working Paper: CEPR ID: DP16294
Authors: Facundo Piguillem; Alessandro Riboni
Abstract: Once established, government spending programs tend to continue. Spending inertia can lead to unsustainable debt levels that require fiscal stabilization, such as “sequestration.” We develop a political economy model of debt with sticky spending by assuming that the government must maintain a fraction of past spending. We show that inertia insures against the risk of political turnover, which may reduce politicians’ incentives to accumulate debt. However, if preexisting commitments are large, as in the current U.S. context, inertia exacerbates incentives to increase debt; faced with the prospect of stabilization, the government overspends to “dilute” the spending commitments of past administrations.
Keywords: government debt; mandatory and discretionary spending; entitlement spending; reform; delayed stabilization; budgetary inertia
JEL Codes: H2; H6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sticky spending (C54) | unsustainable debt levels (F34) |
| spending inertia (D15) | debt accumulation (H63) |
| political turnover (J63) | debt accumulation (H63) |
| overspending (H72) | fiscal stabilization (E63) |
| budgetary stickiness (H61) | deficit bias (H62) |
| spending decisions (H61) | current fiscal policies (E62) |