Institutional Factors and Fiscal Performance : An Empirical Analysis

Since the global financial crisis in 2008, budget deficits and public debt have recorded levels that no one would have imagined a few years ago. Many OECD countries have embarked on fiscal consolidation programs, but fiscal... [ view full abstract ]

Since the global financial crisis in 2008, budget deficits and public debt have recorded levels that no one would have imagined a few years ago. Many OECD countries have embarked on fiscal consolidation programs, but fiscal performance (government debt, fiscal deficit) showed different results. For example, unlike almost all other European countries, Sweden has had budget surpluses and a government debt ratio around 40 percent of GDP even after the recent crisis. The United States has had severe fiscal deficit (approximately -10 percent of GDP) and sizable government debt. The existing literature on the determinants of successful fiscal consolidations dates back to Alesna and Perroti (1996), who claim that budget procedures, budget institutions prevent government from running deficits. Von Hagen (2007) also argued the effect of institutional arrangements on fiscal outcomes by focusing on the role of budgeting institutions and political institutions (especially, electoral systems). More recently, fiscal institutionalists began to study in a more systematic way the influence of the political institution, budget institution, and the type of governments on fiscal performance. Drawing lessons from these researches, this paper attempt to provide an analysis of the influence of institutional arrangements (among others, political and/or budgetary institutions) on fiscal outcomes in the OECD countries. This paper will perform an empirical analysis on OECD countries with an observation period between 2008 and 2014. It will use the panel regression analysis model. The paper brings new evidence on the effect of institutional arrangements on fiscal performance. According to the Von Hagen (2007: 48) “Good institutional design of the budgeting process is an important prerequisite of good fiscal performance.”