IMF Working Papers

The Political Economy of Budget Deficits

Author/Editor:

Alberto Alesina ; Roberto Perotti

Publication Date:

August 1, 1994

Summary:

This paper provides a critical survey of the literature on politico-institutional determinants of the government budget. We organize our discussion around two questions: Why did certain OECD countries, but not others, accumulate large public debts? Why did these fiscal imbalances appear in the last 20 years rather than before? We begin by discussing the “tax smoothing” model and conclude that this approach alone cannot provide complete answers to these questions. We will then proceed to a discussion of political economy models, which we organize in six groups: (i) models based upon opportunistic policymakers and naive voters with “fiscal illusion;” (ii) models of intergenerational redistributions; (iii) models of debt as a strategic variable, linking the current government with the next one; (iv) models of coalition governments; (v) models of geographically dispersed interests; and (vi) models emphasizing the effects of budgetary institutions. We conclude by briefly discussing policy implications.

Series:

Working Paper No. 1994/085

Subject:

Budget planning and preparation Expenditure Fiscal policy Government debt management Public debt Public financial management (PFM)

Notes:

Also published in Staff Papers, Vol. 42, No. 1, March 1995.