The political and economic determinants of budgetary consolidation in Europe

Abstract:

This paper explores the political and economic determinants of fiscal adjustment strategies in the European Union (EU) between 1970 and 2001. Results confirm the hypotheses that, besides economic conditions, fragmentation of decision-making, ideology of the party in government, and closeness to elections affect fiscal policy in general and adjustment strategies in particular. During the nineties, the ideology of the party in government has become the most powerful predictor of fiscal policies and strategies of adjustment. Evidence shows that in the new context, socialist governments prefer to use balanced budgets to finance supply-side policies of capital formation and to maintain public employment, and are reluctant to cut these expenditures even at the expense of public consumption and transfers.