Fiscal adjustment in a panel of countries 1870–2016

The financial crisis from 2007 and, even more so, the Covid-19 pandemic caused large increases in public sector deficits and debts in many countries and prompted concern about fiscal adjustment. This paper examines fiscal adjustment to debt and deficits for a panel of 17 countries over 1870–2016 using the Jordà–Schularick–Taylor Macrohistory Database. This long span panel is informative since it contains many examples of large fiscal shocks similar to those recently experienced. The results from reduced-form models suggest that large deficits or surpluses tend to prompt stabilising feedbacks, mainly through changes in revenue, and there is greater pressure to adjust on countries running a deficit versus those running a surplus. However, the debt–GDP ratio prompts much less stabilising feedback by expenditure or revenue. 1 1 I am very grateful to Professor Ron P. Smith (Birkbeck, University of London) for all the useful comments and providing truly invaluable support in writing this paper. I also greatly appreciate very useful comments provided by an anonymous referee that helped to further enrich the paper. • When considering pooled estimates there is evidence of fiscal sustainability. • Surpluses/deficits mainly adjust themselves through revenue. • There is more pressure to adjust on governments running deficits versus surpluses. • There is less evidence of stabilisation on debt–GDP ratio over shorter sub-periods. • Many outliers fall on periods of wars and financial distress.