The Political Economy of Fiscal Adjustments

Alberto Alesina,

Alberto Alesina Nathaniel Ropes Professor of Political Economy - Harvard University

Jose Tavares, and

JT

Jose Tavares Harvard University

Roberto Perotti

RP

Roberto Perotti

Discussants: Barry Eichengreen and

Barry Eichengreen Professor - University of California, Berkeley

Maurice Obstfeld

Maurice Obstfeld Professor of Economics - University of California, Berkeley

FISCAL DISCIPLINE is currently the main macroeconomic problem faced by industrial and developing countries. Following the fiscal profligacy of the 1970s and early 1980s, deficit reduction has dominated the political economy debate during the past few years. The United States, after experiencing mounting deficits in the early and mid-1980s, has recently achieved a balanced budget. In Latin America, several countries show a marked improvement in their budget balances since the “lost decade” of the 1980s, although it remains to be seen how permanent these adjustments are. In Europe, inflation is stable and low, and most countries joining the European Monetary Union (EMU) have easily satisfied the convergence criterion on inflation, but achieving the fiscal targets has proved a more difficult task. Deficit reduction policies are almost always associated with politically charged issues, such as the retrenchment of overextended welfare states, the reform of insolvent public pension systems, and the trimming of large and inefficient bureaucracies.