A fiscal adjustment is a reduction in the government primary budget deficit, and it can result from a reduction in government expenditures, an increase in tax revenues, or both simultaneously. There is no a clear consensus about the definition of fiscal adjustment, but it is commonly understood as a process, instead of as a status: governments run fiscal deficits, fiscal surpluses or balanced budgets, and the process from a budget deficit to a sustained period of balanced budget is a fiscal adjustment. There are two significant features in any fiscal adjustment: the duration of the process, usually measured in years, that defines the intensity of the effort; and the composition of the adjustment, measured as the proportion of the adjustment obtained from expenditure cuts compared to the proportion gained from tax increases.

Fiscal adjustments in Europe

European countries experienced intense processes of fiscal adjustment during the 1990s, in order to match the Maastricht criteria and to accede to the Economic and Monetary Union (EMU). The treaty established that any country acceding to the Euro area should keep his government primary budget deficit below the line of three percent, and the first assessment was established for 1997. The empirical research found that European governments adopted multiple strategies during the 1990s to fulfill the fiscal prerequisites for EMU accession. It concluded that the

ideology An ideology is a set of beliefs or values attributed to a person or group of persons, especially those held for reasons that are not purely about belief in certain knowledge, in which "practical elements are as prominent as theoretical ones". Form ...

of the party in government became the most powerful predictor of fiscal policies and strategies of adjustment. Evidence shows that in the new context,

socialist Socialism is an economic ideology, economic and political philosophy encompassing diverse Economic system, economic and social systems characterised by social ownership of the means of production, as opposed to private ownership. It describes ...

governments preferred 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. In a most broader analysis of the period, from the 1970s to the present, results confirmed 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.

Fiscal adjustments in the United States

''See'' U.S. monetary and fiscal experience

Fiscal adjustments in Latin America

Due to a combination of factors, including previous debt-based development policies, high interest rates, high oil prices and a decline in the terms of trade Latin American countries experienced a dozen of years of continuous

economic depression An economic depression is a period of carried long-term economic downturn that is the result of lowered economic activity in one or more major national economies. It is often understood in economics that economic crisis and the following recession ...

during the 1980s, known as the lost decade, in which

hyperinflation In economics, hyperinflation is a very high and typically accelerating inflation. It quickly erodes the real versus nominal value (economics), real value of the local currency, as the prices of all goods increase. This causes people to minimiz ...

episodes were common. One of the most pressing issues was to manage the debt burden. And, to this end, during this period, the economic policies of Latin American countries evolved from

import substitution industrialization Import substitution industrialization (ISI) is a protectionist trade and economics, economic policy that advocates replacing foreign imports with domestic production. It is based on the premise that a country should attempt to reduce its foreign ...

to a flawed version of neoliberal economics, sponsored by some international financial institutions like the

World Bank The World Bank is an international financial institution that provides loans and Grant (money), grants to the governments of Least developed countries, low- and Developing country, middle-income countries for the purposes of economic development ...

or the

International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution funded by 191 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of las ...

(IMF), and also known as the

Washington Consensus The Washington Consensus is a set of ten economic policy prescriptions considered in the 1980s and 1990s to constitute the "standard" reform package promoted for Economic crisis, crisis-wracked developing country, developing countries by the Was ...

, that advocated for fiscal discipline and for a

tax reform Tax reform is the process of changing the way taxes are collected or managed by the government and is usually undertaken to improve tax administration or to provide economic or social benefits. Tax reform can include reducing the level of taxati ...

based on a flattening of the tax curve (lowering the tax rates on proportionally high tax brackets, and raising the tax rates on the proportionally low tax brackets). The IMF designed structural adjustment policies that advocated for fiscal adjustments based on expenditure cuts, because they usually included, among other ''conditionalities'': * Cutting social expenditure, * Removing price controls and state subsidies, *

Privatization Privatization (rendered privatisation in British English) can mean several different things, most commonly referring to moving something from the public sector into the private sector. It is also sometimes used as a synonym for deregulation w ...

, or divestiture of all or part of state-owned enterprises.

Additional evidence

According to some empirical research by economists at this institution,Collier and Gunning, 1999 expenditure-based fiscal adjustments were more stable and durable than revenue-based strategies during the 1980s in Latin American and African countries running structural adjustment programs.

References

* Mierau, Jochen O., Richard Jong-A-Pin and Jakob de Haan "Do political variables influence fiscal adjustment decisions? New Empirical Evidence" ''Public Choice'', 2007

* Mulas-Granados, Carlos "The Political and Economic Determinants of Budgetary Consolidation in Europe" ''European Political Economy Review'', 2003
pdf
*Lambertini, Luisa and José Tavares ''Exchange Rates and Fiscal Adjustments: Evidence from the OECD and Implications for EMU'' (Boston College, August 2003
pdf
*Collier, Paul and Jan Willem Gunning "The IMF's role in structural adjustments" International Monetary Fund WPS 99-18 1999.
pdf

Fiscal adjustments in Europe

Fiscal adjustments in the United States

Fiscal adjustments in Latin America

Additional evidence

See also

References

Further reading