metadata: authors: 0: author: Munoz,Ercio
1: author: Olaberria,Eduardo
count: World
docna: 0: docna: Are Budget Rigidities a Source of Fiscal
            Distress and a Constraint for Fiscal Consolidation ?
docty: Policy Research Working Paper
subtopic: Public Sector Economics,Public Finance Decentralization and
            Poverty Reduction,Macro-Fiscal Policy,Economic Adjustment and Lending,Judicial System Reform,Inflation,Public Financial Management,Youth and Governance,Social Analysis,Government Policies,Quality of Life & Leisure,National Governance
teratopic: Law and Development,Macroeconomics and Economic Growth,Public Sector Development,Governance,Social Development
abstracts: cdata!: This paper studies whether budget
            rigidities affect the probability of countries getting into
            fiscal distress and reduce the likelihood of governments
            performing fiscal adjustments. Budget rigidities are
            constraints that limit the ability of the government to
            change the size and structure of the public budget in the
            short term. Budget rigidities stem from different
            institutional arrangements and therefore can take different
            forms. To build an indicator of rigid spending that is
            comparable across a large set of countries, this paper
            employs a simple definition based on budget components that
            are naturally inflexible: the sum of public wages, pensions,
            and debt service. It decomposes this measure into a
            structural component and a nonstructural component. Then,
            the paper applies a linear probability model to a panel of
            182 advanced and developing countries. A key finding is that
            relatively high shares of rigid (observed) components of
            public spending contribute to countries getting into fiscal
            distress and are a constraint for fiscal consolidation. The
            paper finds evidence that a relatively high share of
            nonstructural rigid spending contributes to the probability
            of fiscal distress and reduces the probability of fiscal
            consolidation. Moreover, the effect of rigid expenditure
            seems to be more relevant for economies with high
            inequality, governments with lower margins of majority, and
            countries with lower institutional quality. In addition,
            when looking at the composition of the measure of rigid
            expenditure, there is also some evidence that higher
            expenditure on pensions reduces the probability of fiscal
            adjustment more robustly than higher expenditure on wages.
repnme: repnme: Are Budget Rigidities a Source of Fiscal
            Distress and a Constraint for Fiscal Consolidation ?
display_title: Are Budget Rigidities a Source of
            Fiscal Distress and a Constraint for Fiscal Consolidation
listing_relative_url: /research/2019/08/31315490/budget-rigidities-source-fiscal-distress-constraint-fiscal-consolidation
topicv3: Justice m1326106 840,Political Economy of Reform m1326263 836,Public Finance Management m1326316 716,Fiscal Consolidation m1326651 1116,Inflation m1326709 0870F4727ACED1CF8525815C00471347
publishtoextweb_dt: 2019-08-06T00:00:00Z
historic_topic: Law and Development,Macroeconomics and Economic Growth,Public Sector Development,Governance,Social Development
no_of_pages: 87
author_keys: 0: author_key: 997206
model_extractions: Policy Research Working Paper 8957 Are Budget Rigidities a Source of Fiscal Distress and a Constraint for Fiscal Consolidation?

_Ercio Muñoz Eduardo Olaberria_ Macroeconomics, Trade and Investment Global Practice August 2019
Policy Research Working Paper 8957

# **Abstract**

This paper studies whether budget rigidities affect the probability of countries getting into fiscal distress and reduce the likelihood of governments performing fiscal adjustments. Budget rigidities are constraints that limit the ability of the government to change the size and structure of the public budget in the short term. Budget rigidities stem from different institutional arrangements and therefore can take different forms. To build an indicator of rigid spending that is comparable across a large set of countries, this paper employs a simple definition based on budget components that are naturally inflexible: the sum of public wages, pensions, and debt service. It decomposes this measure into a structural component and a nonstructural component. Then, the paper applies a linear probability model to a panel of 182 advanced and developing countries. A key finding is that relatively high shares of rigid (observed) components of public spending contribute to countries getting into fiscal distress and are a constraint for fiscal consolidation. The paper finds evidence that a relatively high share of nonstructural rigid spending contributes to the probability of fiscal distress and reduces the probability of fiscal consolidation. Moreover, the effect of rigid expenditure seems to be more relevant for economies with high inequality, governments with lower margins of majority, and countries with lower institutional quality. In addition, when looking at the composition of the measure of rigid expenditure, there is also some evidence that higher expenditure on pensions reduces the probability of fiscal adjustment more robustly than higher expenditure on wages.

This paper is a product of the Macroeconomics, Trade and Investment Global Practice. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at eolaberria@worldbank.org and emunozsaavedra@gradcenter.cuny.edu.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Are Budget Rigidities a Source of Fiscal Distress and a Constraint for Fiscal Consolidation?**

## Ercio Muñoz and Eduardo Olaberria<sup>1</sup>

**Keywords:** Fiscal consolidation, budget rigidities, fiscal policy **JEL codes:** H60 E62, E32

> 1 The authors are very thankful to Carlos Vegh, Guillermo Vuletin, Franziska Ohnsorge, and Santiago Herrera for very helpful comments and suggestions.
# Contents

|1.|Introduction ...................................................................................................................................... - 2 -|
|---|---|
|2.|Literature review ............................................................................................................................... - 8 -|
|3.|Conceptual framework ................................................................................................................... - 10 -|
|4.|Estimation methodology ................................................................................................................. - 12 -|
|I.|Identifying fiscal adjustment need .............................................................................................. - 12 -|
|II.|Identifying fiscal adjustment ....................................................................................................... - 13 -|
|III|.<br>Measuring budget rigidities .................................................................................................... - 14 -|
|IV|.<br>Estimation framework ............................................................................................................ - 15 -|
|V.|Results ............................................................................................................................................. - 16 -|
||On the determinants of need of fiscal adjustment ......................................................................... - 16 -|
||Probability of a successful fiscal adjustment .................................................................................. - 21 -|
|VI.|Robustness checks ...................................................................................................................... - 27 -|
|VII.|Conclusion ................................................................................................................................... - 29 -|
|Refe|rences .............................................................................................................................................. - 31 -|
|App|endix 1: Literature Review ................................................................................................................ - 34 -|
|App|endix 2: Episodes of fiscal need and fiscal adjustment .................................................................... - 37 -|
|App|endix 3: Linear probability models: .................................................................................................. - 47 -|
|App|endix 4: Logit models: ....................................................................................................................... - 53 -|
|App|endix 5: Conditional logit models: .................................................................................................... - 61 -|
|App|endix 6: Model with sample selection correction ............................................................................ - 69 -|
|App|endix 7: Linear probability model controlling for size of the need (primary gap) ........................... - 73 -|
|App|endix 8: Linear probability model with dependent variable identified as Lavigne (2011) ............... - 77 -|
|App|endix 9: Linear probability model with need under stressed conditions ......................................... - 81 -|

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Despite being a well-known problem to policy makers, the issue of how budget rigidities contribute to putting countries in fiscal distress or constrain the ability of government to perform fiscal adjustments remains largely unexplored in the literature. The literature on public choice, for instance, has explored the reasons underpinning the emergence of rigidities, but the pervasive effects of budget rigidity have not received a systematic treatment in the literature despite being regularly mentioned in policy papers dealing with fiscal issues.

In this paper we seek to help close this gap in the literature by assessing the effects of budget rigidities on the need and ability of governments to make fiscal adjustments. We consider periods when governments should be making fiscal efforts but fail to do so, as well as periods when no adjustment is required. Therefore, from a policy perspective, this paper addresses two important issues that have received little attention. First, how budget rigidities contribute to creating situations of fiscal distress. While there is plentiful anecdotal evidence of how rigid spending can hinder sound policies, to the best of our knowledge, there has not been much empirical work on the subject. Second, how rigidities influence the likelihood of successful fiscal efforts, defined as those cases when countries that are facing a need to adjust manage to do so.

To do this, we would ideally like to use a wide definition of budget rigidities; one that encompasses all institutional, political and legal constraints. However, differences in institutional settings across countries represent a major obstacle to systematically collecting international data for comparison purposes, as comparing budget rigidity across countries requires making judgments about the strength of similar constraints in different institutional settings and political realities. Therefore, for simplicity and to be able to compare measures across a large set of countries, we decided to employ a minimal and generally accepted measure of rigidities (see Vegh et al., 2017): the sum of public wages, social benefits,<sup>3</sup> and debt services as a share of GDP.

These expenditure categories, which are naturally rigid, are difficult to cut in the short run because of political economy or credit market access problems. The consensus among policy makers in the region is that, the higher they are, the more difficult it becomes to follow fiscal consolidation via expenditure reduction. Not surprisingly, the countries in the region that require greater fiscal adjustment are generally those countries with the highest shares of rigid expenditures (Figure 3).

> 3 Given that several countries do not report pensions, we use a proxy of social benefits derived from current expenditure subtracting wages, interests, and goods and services.

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Primary deficit <!-- Start of picture text --> 4%<br>y = -0.1466x + 0.0091<br>© Mexico R? = 0.2248<br>2%<br>@.. El Salvador @ Honduras<br>0% “ittes-.@,, Guatemala - .<br>‘@ Dominican Republic @ Panama ® Colombia @ Uruguay<br>ace @ Nicaragua<br>-2% @ Peru re teers @ Brazil<br>© Costa Rica @ Ecuador ee,<br>-4%<br>@ Argentina<br>-6% -<br>@ Bolivia<br>-8%<br>0% 5% 10% 15% 20% 25% 30% 35%<br>Rigid spending<br><!-- End of picture text --> <!-- Start of picture text --> % of GDP<br>45%<br>40%<br>35%<br>30%<br>25%<br>20%<br>15%<br>10%<br>5%<br>0%<br>SSSSGSLSESLESESSSESLESTESLSLLLELTLELTTESVELELLEEgs o 38 8 Besegeg $88 ee 2 sR y EERPCESTESCESELTE ETRER<br>FEULTOCESBCs 2 LACEUIOSEECEELECSITTSE sf ssge"s- g g428 “3572TE RCESUTESSaEdeé gape ST LIISIge2e*TE EEE2<br>= s 3 &<br>6§==<br><!-- End of picture text -->
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because of changes in the eligibility criteria, with more generous replacement ratios and changes in indexation rules.

**Table 1: Changes in primary deficit and items of public expenditures between 2008 and 2017 (% of GDP)**

|**Country**|**Primary deficit**|**Public wages**|**Social benefits**|**Interest**|
|---|---|---|---|---|
|Argentina|6.2%|3.3%|5.0%|0.5%|
|Peru|6.1%|0.9%|-0.3%|-0.5%|
|Chile|5.9%|1.5%|-0.5%|0.3%|
|Brazil|5.5%|0.1%|2.1%|0.5%|
|Costa Rica|5.3%|1.7%|-0.1%|0.6%|
|Ecuador|4.9%|2.2%|2.4%|1.0%|
|Panama|3.1%|1.9%|-0.6%|-1.4%|
|Colombia|2.1%|-0.2%|0.4%|-0.1%|
|Uruguay|1.6%|0.6%|4.0%|0.3%|

_Source_ : Authors’ own calculations based on data from IMF, World Bank and national institutes of statistics.

To estimate how these measures of budget rigidities affect the probability of countries getting into fiscal distress and the likelihood of doing a fiscal adjustment, we use the following strategy. First, we identify periods of adjustment needs based on two different methodologies: one based on consecutive years of primary gaps above certain threshold, and the other based on the level of debt. Second, we identify periods of fiscal adjustment as years where there was at least a 0.1% of GDP improvement in the cyclically adjusted primary balance for two consecutive years (Escolano et al., 2014). Then, we estimate a linear probability model using a panel of 182 advanced and developing countries controlling for economic and political factors that previous literature has identified as potential determinants of governments having fiscal adjustment needs and the ability to do so.

We find that the actual levels of rigid components of public spending (wages, pensions and interests) are positively associated with the probability of countries getting into fiscal distress and are negatively associated with the ability to consolidate. This result may appear counterintuitive, as many advanced economies with relatively high shares of rigid spending have had successful fiscal consolidations. However, we find more robust evidence by using the share of non-structural rigid spending (when spending on public wages and pensions is above what the fundamentals of their economy would suggest), which may explain why these apparently rigid economies have been able to pursue fiscal consolidations. Moreover, the effect of rigid expenditure seems to be more relevant for economies with higher inequality, government with lower margin of majority and countries with lower institutional

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quality. In addition, when looking at the composition of our measure of rigid expenditure, we also find some evidence that higher expenditure in pensions reduces the probability of fiscal adjustment more robustly than higher expenditure in wages.

The rest of the paper is organized as follows. Section 2 presents a review of the relevant literature to highlight our main contributions. Section 3 presents the conceptual framework. Then, sections 4 and 5 present the estimation methodology and the main results of the paper. Finally, section 6 concludes.

# 2. Literature review

This paper is related to several strands of research in the literature (see Table 9 in the appendix). First, it is related to the large literature on the determinants of fiscal distress and adjustment (see Perotti, 1998; Persson and Tabellini, 1999; and Pinho, 2004 for general surveys). Although this literature is extensive, very few studies have focused on the size of budget rigidities and the difficulty of achieving large fiscal adjustments. This literature has identified major determinants of the likelihood of starting fiscal consolidation and its success _._ Most of the literature concentrates on the composition of consolidation, whether it should be based on expenditure cuts or revenue increases. There seems to be a consensus that adjustments based on expenditure cut tend to be more successful that adjustments based on raising revenues. Adjustments based on expenditure cuts are found to be more effective (Alesina and Ardagna, 1998; Ardagna, 2009; von Hagen et al., 2002; Guichard et al., 2007; Barrios et al., 2010), and the main explanation is that they are often coupled with reforms that enhance the effectiveness of budgetary procedures (European Commission, 2007).

Evidence shows that fiscal consolidation is more likely during periods of weak public finance conditions (Barrios et al., 2010; Guichard et al., 2007; European Commission, 2007; Von Hagen and Strauch, 2001). Stronger economic growth can contribute to successful consolidations (von Hagen and Strauch, 2001), as positive output gaps increase the probability of launching a retrenchment. In particular, governments are more likely to undertake consolidation efforts when the domestic economy is doing well relative to other economies (Von Hagen and Strauch, 2001).

Perhaps closer to the spirit of our paper, some studies have shown that reducing budget items that are politically sensitive makes a significant contribution to successful consolidations (Perotti et al., 1998). While some studies find that cutting social spending and transfers is key to reach a successful consolidation (Guichard et al., 2007), others find that fiscal consolidation should incorporate cuts in welfare spending and government wages to be successful (Alesina and Perotti, 1997). Von Hagen and

- 8 -
Strauch (2001) find that, in OECD countries, cuts in subsidies and transfers reduce on average 50% of current spending during successful consolidations. Cutting public wage expenditures contribute an average of 36% to the reduction in public spending during successful consolidations. On the contrary, they find that a characteristic of unsuccessful fiscal consolidation episodes is that public wages do not fall significantly in relation to GDP. In sum, these results suggest that tackling politically sensitive budgetary items is a characteristic of successful consolidations.

A main difference between our paper and most of previous studies in this literature is that we include both advanced and emerging economies, whereas most previous studies (see Table 9 in the appendix) focus only on advanced economies (usually a subset of OECD countries). A second important difference is that most of this literature starts by identifying a fiscal adjustment based on changes in the cyclically adjusted primary balance and examines how successful those adjustments were, where success is usually defined in terms of the lasting effect the adjustment program has on reducing the government debt-to-GDP ratio (see Table 9). In this paper, we first identify which countries are in need of fiscal adjustment (we do this by applying two different methodologies described below) and estimate if budget rigidities contribute to fiscal distress. Then, among the countries that need to adjust, we estimate whether budget rigidities represent a constraint to fiscal consolidation.

Second, this paper is related to the literature analyzing the economic implications of budget rigidities. The literature on budget rigidities is surprisingly limited given how well-known and pressing the problem is to policy makers in Latin America. Several authors argue that budget rigidities introduce inefficiencies (Echeverry and others, 2005, 2006 and 2009; Mattina, 2007). These studies suggest there is a negative association between rigidity and efficiency of the public sector, where countries with more rigid spending (measured as a percentage of primary spending or as a percentage of GDP) have lower efficiency scores. According to the previous literature, budget rigidities negatively affect budget management by limiting the reallocation of public spending in response to changing needs, promoting poor quality fiscal adjustments and generating a bias towards higher spending and taxation, introducing distortions in tax policy choices, limiting the scope for countercyclical fiscal policy, and weakening incentives to improve the efficiency of public spending (Alier, 2006).

The paper that comes closest to our work is Lavigne (2011), which uses a similar methodology: first identify a fiscal adjustment need and then the determinants of successful adjustment. However, our study differs with respect to Lavigne (2011) in two dimensions. First, it differs because of the criteria used to identify fiscal adjustment needs and the fiscal consolidation process, and the inclusion of budget

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rigidities as determinants of adjustment needs as well as constraints to successful fiscal adjustments. Second, we take into consideration the panel nature of the data and estimate a model that controls for unobserved time-invariant heterogeneity across countries. This issue in the literature of fiscal adjustment has been previously pointed out by Mierau et al. (2007).

# 3. Conceptual framework

The goals of this paper are first to analyze if budget rigidities contribute to countries getting into fiscal distress and second if budget rigidities represent a constraint to initiate fiscal consolidations. To answer these questions, we develop a framework where a country starts off either in a situation of fiscal need or not. If the country does face a need for fiscal adjustment, then the government must decide whether to attempt it or not. In this process, budget rigidities enter twice. First, they can play a role getting countries in fiscal distress, making a fiscal adjustment a requirement to stabilize or reduce the public debt. Second, in those countries where a fiscal adjustment is necessary, governments must decide whether to do the adjustment or not. Here budget rigidities, in combination with economic and political factors can play a key role.

The concept of fiscal need is critical to our purpose. We assume that when any country is facing an objective need for fiscal adjustment, the government will attempt to do so; if it does not do so, it is because of institutional, economic and/or political factors that constrain the government’s ability. For this hypothesis to be reasonable, the fiscal need must be clear and pressing. We identify episodes of fiscal adjustment need using two different approaches. First, we follow Escolano et al. (2014) to define fiscal adjustment need as years in which a country is facing a positive primary gap for two consecutive years greater or equal than an arbitrary threshold (see below for more details). Second, we consider the case of countries with the ratio of public debt over average revenue above a country-specific rolling Gaussian weighted average for two consecutive years.

Conceptually it is clear how budget rigidities can increase the probability of countries getting into fiscal distress and constrain the ability of governments to consolidate. The political economy theory emphasizes that government spending often increases because relevant expenditure items are rigid as a result of entitlements or indexation to economic variables that are outside the control of the government (Perotti et al., 1998). This way, expenditures cannot be modified during the annual decision-making

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process over the public budget. These can be very important sources of the loss of control of fiscal policy that can get countries into fiscal distress.

Similarly, indication that Latin American countries face tough political battles when trying to implement the fiscal adjustments that involve cutting public wages or social benefits is widespread. For example, Argentina’s lower house on December 2017 had to suspend a vote on President Mauricio Macri’s pension reform plan (which hoped to limit the growth rate of pensions bill), after the debate became a shouting match and protesters and police clashed violently outside Congress. The bill, which was crucial for the government’s efforts to cut the fiscal deficit, drew strong criticism from opposition politicians and labor unions, who said it would hurt retirees and welfare recipients. The pension reform hoped to change the formula used to calculate benefits. Payments would adjust every quarter based on inflation, rather than the previous system of twice-yearly adjustments indexed to wage rises and tax revenue.

Also, there are several economic and political variables that can affect the sustainability of public finances. A consensus within the political economy literature is that governments pursue expansionary fiscal policies before elections to get re-elected (see de Haan and Klomp, 2013 for a survey). This means that governments are unlikely to introduce fiscal adjustments when elections are near, as that will be politically very costly. Furthermore, governments are likely to follow expansionary fiscal policies during election years to increase their probabilities of being (re)elected. In sum, the fact that a country is in an election year should increase the probability that the country gets into fiscal distress, and if it is already in need of fiscal adjustment, reduce the probability that a fiscal consolidation process is initiated. However, voters may be fiscal conservatives and therefore not reward expansionary policies during elections (Pelzman, 1992).

The margin of majority is another political variable that can affect the fiscal status of countries. Lack of political stability or a minority in Congress can reduce effective government control over the budgetary process, increasing the chances of a successful fiscal effort. Previous empirical evidence shows that an index of political fragmentation correlates well with the size of deficits in advanced countries (Roubini and Sachs, 1989). This is due to short tenures and the difficulty of reaching an agreement among different political parties, explaining why coalition governments are more prone to fiscal indiscipline. Other authors have shown that a highly polarized government with alternating majority in Congress increases the risk of electoral loss and leads policy makers to run deficits that will constrain the actions of their successors (Tabellini and Alesina, 1990).

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Societal divisions that lead to social conflict can also affect the sustainability of public finance. In particular, the level of income inequality can affect the composition and size of government spending. In the words of Sachs (1989), “Economic policymaking in Latin America remains a battleground of conflicting interest of class, sectors, regions, and ethnic groups.” Part of the reason is that income inequality in Latin America remains relatively high. If we take a model with heterogeneous households, these households are going to have different opinions regarding the convenience of following a fiscal adjustment based on cutting public spending. Indeed, the medium voter theory, when income inequality is very high, would predict that voters would rather vote to increase tax rates rather than cut spending. In more unequal societies, the median voter will be relatively poorer than the average household (her income will be lower in relation to mean income). Therefore, if net governmental transfers (transfers minus direct taxes) are progressive, the more unequal is the income distribution, the more the median voter has to lose through fiscal consolidations that are based on cutting current public spending.

# 4. Estimation methodology

The core of the investigation consists of identifying episodes in which countries need fiscal adjustment and whether they adjust or not during those episodes. Having these episodes identified, we will analyze potential economic and political determinants of them with a focus on the impact of a measure of budget rigidities.

## I. Identifying fiscal adjustment need

We identify episodes of fiscal adjustment need using two different approaches. First, we follow Escolano et al. (2014) to define fiscal adjustment need as years in which a country is facing a positive primary gap for two consecutive years greater or equal than an arbitrary threshold. The primary gap is defined as:

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where i is the nominal interest rate at the current level, i the country nominal GDP growth rate, and i is a constant stock of debt (in percent of GDP) based on the historical country-group rr gg (advanced economies, and emerging markets and developing economies) median debt stocks as the dd target debt ratio.

The threshold is set to the median primary gap among the countries with positive gap and it is computed by country-group. For advanced countries it corresponds to a primary gap of 3.7% of GDP and for EMEs is 5.7% of GDP.

Second, we consider the case of countries with the ratio of public debt over average revenue (defined in Kose et al., 2017 as a measure of fiscal space) above a country-specific rolling Gaussian weighted average for two consecutive years.

Table 10 shows the episodes of adjustment need identified for advanced economies. We identify 38 episodes for 26 countries (out of 34 for which we have data). Table 11 shows 68 episodes identified for emerging economies, they span across 49 countries (of 70). Similarly, Table 14 and Table 15 show the episodes identified using debt-to-revenue ratios. We identify 78 episodes for 35 advanced economies (of 36) and 301 episodes spanning across all the 146 developing countries with available data.

# II. Identifying fiscal adjustment

To identify episodes of fiscal adjustment, we follow Escolano et al. (2014) and define adjustment status as periods in which there are two consecutive years with an annual change of at least 0.1% of GDP in the cyclically adjusted primary balance during years of fiscal need. We consider that a period of adjustment continues when the cyclically adjusted balance shows a positive or null change and when a fall of less than 0.3% of GDP is followed by an improvement of at least 0.5% of GDP. These episodes need to coincide with a period of fiscal need, hence for each measure of fiscal need we can compute a different set of episodes of fiscal adjustment.

Table 12 shows the 16 episodes of adjustment identified for advanced economies which span across 14 countries (of 26 economies with episodes of need). Table 13 shows the case of emerging economies, we find 18 episodes for 16 countries (of 49 economies with episodes of need). Similarly, Table 16 and Table 17 use need with debt/revenue. We find 59 episodes of fiscal adjustment in advanced economies including 32 countries (of 35 with episodes of need), and 120 episodes in developing economies which span across 89 countries (of 146).

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# III. Measuring budget rigidities

Measuring budget rigidities in a cross-country setting is a difficult task, as differences in institutional settings represent a major obstacle to systematically collect international data that can be compared across a large set of countries. Comparing budget rigidity across countries requires making judgements about the strength of similar constraints in different institutional settings and political realities. For simplicity, in this paper we have employed a minimal and generally used measure of rigidities (Vegh et al, 2017): the sum of public wages, social benefits,<sup>4</sup> and debt interest payments as a share of GDP; the components of spending that are naturally rigid. This measure of rigidities assumes that these expenditures categories are, in the short run, beyond the policy makers’ control.

However, looking only at the actual level of these rigid components of public expenditures could be misleading, in particular for the cases of public wages and social security benefits. For instance, it should be clear that the ratio of public wages to GDP of Honduras will be significantly below the level of France, as they have different levels of productivity. Economic theory teaches us that the wage level increases with the level of wealth of the country (the Balassa and Samuelson effect). Balassa-Samuelson show that different productivity levels across countries lead to higher wages in wealthier countries (higher productivity countries). Similarly, the share of social security (pensions) in GDP will also be affected by demographic factors as well as the level of productivity in the country (as higher wages are related to higher pensions). Thus, theory predicts that the sum of public wages and social benefits as a percentage of GDP (or total public expenditures) will be higher in more advanced countries than in less advanced ones. But having higher shares of public wages and pensions, as theory would predict, will not necessarily get countries into fiscal distress or limit the ability of governments to adjust the fiscal deficit. At the end, their economic structure suggests that these components of government spending should be relatively high in the long-run.

Therefore, we also estimate a second measure of rigidity of government spending considering that the wages and pensions can be decomposed into a structural and a non-structural component. While the structural component is determined by long-run economic fundamentals beyond the policy makers’ control, the non-structural one is determined by policy decisions. The structural components are interpreted as the level of spending the countries should have based on their level of development, productivity and age-profile of the population. Then, we compare the structural component of general

> 4 Current expenditure minus purchase of goods and services, expenditure in wages and paid interests.

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government wage bill and pension payments with the observed rigid spending to arrive to the nonstructural. When countries are above their structural level, this means that they could be overspending in areas that are relatively rigid (difficult to reduce in the short run). This could lead them to fiscal distress and reduce their ability to adjust the fiscal deficit through budget cuts.

To estimate the structural level of compensation to employees (see section on measurement), we estimate a fixed effects model (for 166 countries over the period between 1990 and 2017) that includes as dependent variable the log of the compensation of employees per capita in constant international dollars regressed against the log of GDP per capita, a linear time trend, and the log of the population. In the case of pensions, we run a fixed effects regression (for 63 countries over the period between 1990 and 2017) using pension payments per capita in constant international dollars as dependent variable, and the old age dependency ratio, GDP per capita in constant international dollars (as a proxy for wage levels, see section on measurement in this report for more details), and the revenues of the general government social security system in constant international dollars, as explanatory variables. In both cases, we correct downward the predicted values using 1.5 times the interquartile range of the residuals.

# IV. Estimation framework

The econometric specification is a linear probability model and corresponds to the following: i i i i ii where i is a binary dependent variable that indicates the fiscal status (need or adjustment YY = αα + ββXX + ZZ δδ+ εε conditional on having need) in country _i_ at year _t_ ; i is a measure of the degree of budget rigidities; i YY is a matrix that include a set of economic and political economy control variables; and _δ_ are the XX ZZ coefficient of interest and a vector of coefficients associated with the control variables; is a country ββ fixed effect to control for potential unobserved time-invariant factors in the regression; and ii i a meanαα zero random disturbance. εε The variable of interest corresponds to a measure of budget rigidity: a) Traditional: The sum of compensation to employees, social security and interest payments as share of GDP; b) Structural: We compute the deviation between the traditional measure and a structural component that reflects the minimum expenditure a country could have given its level of development and other structural factors.

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As control variables we use a group of economic and political variables previously analyzed in the literature of successful fiscal consolidations.

In the economic variables we include lagged real GDP growth, lagged inflation rate, and international interest rate (long-term U.S. government bond yield: 10 years). These variables are taken from the IMF World Economic Outlook (October 2018).

The information from political variables (majority government and election year) come from the Database of Political Institutions 2017, which is hosted at the Inter-American Development Bank and has coverage of 180 countries from 1975-2017. Rule of law comes from the PRS Group in their International Country Risk Guide. The scores are based on evaluations from experts surveyed and the data are available since 1984 for a group of 140 countries. The Gini coefficient comes from the data set “All the Ginis” created by Branko Milanovic. Table 2 shows some summary statistics of the control variables for the sample with available data to identify need of fiscal adjustment.

**Table 2: Descriptive statistics of the control variables**

||<br>|a) Sample|with pr<br>|imary ga<br>|p|b) Sample wit<br>|h debt/<br>|revenue<br>|ratio|
|---|---|---|---|---|---|---|---|---|---|
||N|mean|SD|min|max|N<br>mean|SD|min|max|
|GDP growth||0.03|0.04|-0.16|0.30|0.04|0.05|-0.46|0.92|
|Inflation||0.06|0.10|-0.09|2.02|0.06|0.10|-1.30|2.02|
|Interest rate||3.91|1.55|1.80|8.55|4.11|1.64|1.80|8.55|
|Gini||39.09|9.84|17.50|74.30|40.31|9.78|17.50|77.40|
|Rule of law||4.10|1.40|1.00|6.00|3.89|1.37|0.00|6.00|
|Margin of Majority||0.59|0.17|0.05|1.00|0.64|0.20|0.03|1.00|
|Election'syear||0.29|0.45|0.00|1.00|0.25|0.43|0.00|1.00|
|Observations|2002|||||4046||||

# V. Results

In general, the results provide evidence that budget rigidities do affect the probability that countries get into financial distress; in addition, we find evidence on rigidities being a constraint for successful fiscal consolidations. Indeed, the factors found to increase the probability of achieving a successful adjustment effort are not necessarily the same as those favoring the maintenance of sound fiscal policies.

## On the determinants of need of fiscal adjustment

In general, the results presented in Table 3 and

- 16 -
**Table** **_4_** are in harmony with our expectations. The first insight is that higher shares of budget rigidities are positively and significantly associated with the need of fiscal adjustment.<sup>5</sup> This result is robust to the inclusion of political and economic control variables, as well as to the different methodologies to identify the need for fiscal consolidation (using primary gap or debt over revenue). The results are consistent with the findings of previous studies, i.e., Perotti et al. (1998), who show that higher levels of public wages and social transfers are associated with unsustainable paths of fiscal policy. In addition, the impact of the budget rigidities differs between advanced and emerging economies, being lower in the case of the later (see column 5 in Table 3 and

# **Table** **_4_** ).

**_Economic factors_** : our results show that economic factors, such as economic growth, inflation and interest rate, are significant determinants of the need for fiscal adjustment but only growth appears to be robust across different specifications. As expected, higher economic growth in previous years reduces the need for fiscal adjustment. This is consistent with economic theory, as stronger economic growth increases tax revenues, reducing the fiscal deficit. In the case of inflation, the positive and significant coefficient (although not across all specifications) fits with the idea that higher increases in prices are generally associated with bad macroeconomic management, which should lead to periods of fiscal distress. The level of interest rate is negatively associated to fiscal need although only statistically significant when we use the structural measure of rigidities (Table 18 in the Appendix). This is puzzling considering that we would expect higher financing costs leading to more fiscal distress.

> 5 The results are qualitatively similar if we use the structural measure, these are reported Table 18 and Table _19_ in the Appendix to save space.

- 17 -
**_Political variables_** : the previous literature has identified several political factors that can affect the need for fiscal adjustments, focusing mainly on the possible role of elections and budget institutions (Beetsma and others, 2009, 2012 and 2015). In general, these variables are not statistically significant, suggesting that political economy factors do not play a significant role in the dynamics of fiscal adjustment. The only exception is election year, which is positive and significant in specifications that identify need using the primary gap (Table 3 and Table 18 in the Appendix), in line with the prediction of political economy theory that during election years governments are more likely to increase spending (to increase the likelihood of winning the election) and get countries into fiscal distress.

**_Interactions_** : In addition to adding economic and political controls, we estimate models that allow for non-linearities in the impact of budget rigidities. We do so by interacting our variable of interest with a binary variable indicating developing economies and our political controls. We find some evidence that the impact of the budget rigidities differs between advanced and emerging economies, being lower in the case of the latter (see column 5 in Table 3,

**Table** **_4_** , and Table 18 and Table 19 in the Appendix). We do not find any significant role in the case of the political factors except for some limited evidence that higher rule of law increases the impact of budget rigidities on the probability of fiscal need (see column 7 in Table 4 and

Table _19_ of the Appendix). This result could potentially be explained by a stronger enforcement of legal rigidities in the budget, but more research is needed to make this statement categorically.

**_Composition_** : To study the composition of our measure of rigid expenditure, we run a similar set of regressions separating the wage bill from social security expenditure. The results, which are reported in Table 20 and Table 21 of the appendix, are qualitatively similar and suggest that both components are associated with an increase in the probability of fiscal adjustment need.

- 18 -
# **Table 3**

- 19 -
|Dependent variable:|Need of fisc|al adjustm|ent based o|n Escolano|et al.(201|4)|||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure|0.037***|0.033***|0.038***|0.032***|0.041***|0.033***|0.021|0.028***|
|(% of GDP)|(0.006)|(0.005)|(0.006)|(0.005)|(0.007)|(0.010)|(0.013)|(0.009)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-1.928***||-1.829***|-1.749***|-1.824***|-1.820***|-1.841***|
|||(0.413)||(0.420)|(0.409)|(0.424)|(0.416)|(0.424)|
|Inflation (t-1)||-0.090||-0.053|-0.049|-0.053|-0.051|-0.056|
|||(0.074)||(0.066)|(0.062)|(0.066)|(0.067)|(0.067)|
|U.S. Interest rate||-0.012||-0.015|-0.017|-0.015|-0.017|-0.015|
|||(0.010)||(0.011)|(0.011)|(0.011)|(0.011)|(0.011)|
|**Political factors**|||||||||
|Gini|||0.007|0.005|0.005|0.006|0.005|0.005|
||||(0.005)|(0.005)|(0.005)|(0.007)|(0.005)|(0.005)|
|Rule of law|||0.002|0.012|0.004|0.012|-0.053|0.013|
||||(0.029)|(0.030)|(0.029)|(0.030)|(0.050)|(0.030)|
|Margin of Majority|||0.092|0.059|0.066|0.059|0.063|-0.094|
||||(0.123)|(0.124)|(0.124)|(0.124)|(0.125)|(0.231)|
|Election's year|||0.021|0.028*|0.029**|0.028*|0.028*|0.028*|
||||(0.015)|(0.015)|(0.015)|(0.015)|(0.015)|(0.015)|
|**Interactions**|||||||||
|EMEs * Rigidity|||||-0.017*<br>(0.010)||||
|Gini * Rigidity||||||-0.000<br>(0.000)|||
|Rule of law * Rigidity|||||||0.002<br>(0.002)||
|Majority * Rigidity||||||||0.007<br>(0.012)|
|Constant|-0.840***|-0.607***|-1.212***|-0.884***|-0.874***|-0.913**|-0.618*|-0.796***|
||(0.163)|(0.136)|(0.308)|(0.277)|(0.275)|(0.346)|(0.327)|(0.297)|
|Observations|1,521|1,500|1,360|1,342|1,342|1,342|1,342|1,342|
|R-squared|0.126|0.182|0.139|0.186|0.193|0.186|0.188|0.187|
|Number of ifscode|84|84|75|75|75|75|75|75|
|CountryFE<br>Robust standard erro<br>*** p<0.01, ** p<0.0|Yes<br>rs clustered<br>5, * p<0.1|Yes<br>by country|Yes<br>in parenth|Yes<br>eses|Yes|Yes|Yes|Yes|

**Table 4**

- 20 -
|Dependent variable:<br>Variables|Need of fis<br>(1)|cal adjustm<br>(2)|ent based<br>(3)|on debt/re<br>(4)|venue<br>(5)|(6)|(7)|(8)|
|---|---|---|---|---|---|---|---|---|
|Rigid expenditure|0.023***|0.024***|0.026***|0.023***|0.051***|0.019|0.001|0.031***|
|(% of GDP)|(0.004)|(0.005)|(0.007)|(0.007)|(0.011)|(0.019)|(0.014)|(0.012)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-1.357***||-1.688***|-1.449***|-1.694***|-1.631***|-1.666***|
|||(0.320)||(0.334)|(0.340)|(0.335)|(0.343)|(0.332)|
|Inflation (t-1)||0.020||0.214|0.232*|0.215|0.200|0.217*|
|||(0.135)||(0.132)|(0.130)|(0.132)|(0.133)|(0.131)|
|U.S. Interest rate||0.005||0.001|-0.004|0.001|-0.003|0.001|
|||(0.011)||(0.012)|(0.012)|(0.012)|(0.012)|(0.012)|
|**Political factors**|||||||||
|Gini|||0.008|0.007|0.006|0.005|0.007|0.007|
||||(0.005)|(0.005)|(0.005)|(0.009)|(0.005)|(0.005)|
|Rule of law|||0.025|0.033|0.023|0.034|-0.100|0.032|
||||(0.038)|(0.046)|(0.046)|(0.046)|(0.087)|(0.046)|
|Margin of Majority|||-0.091|-0.073|-0.080|-0.072|-0.073|0.146|
||||(0.152)|(0.156)|(0.151)|(0.156)|(0.158)|(0.285)|
|Election's year|||-0.009|-0.012|-0.009|-0.012|-0.011|-0.013|
||||(0.015)|(0.015)|(0.016)|(0.015)|(0.016)|(0.016)|
|**Interactions**|||||||||
|EMEs * Rigidity|||||-0.043***<br>(0.014)||||
|Gini * Rigidity||||||0.000<br>(0.000)|||
|Rule of law * Rigidit|y||||||0.006*<br>(0.003)||
|Majority * Rigidity||||||||-0.013<br>(0.013)|
|Constant|-0.125|-0.106|-0.558*|-0.455|-0.508*|-0.383|0.015|-0.589*|
||(0.096)|(0.122)|(0.321)|(0.299)|(0.290)|(0.420)|(0.393)|(0.337)|
|Observations|3,046|2,911|2,066|2,007|2,007|2,007|2,007|2,007|
|R-squared|0.026|0.042|0.031|0.049|0.064|0.049|0.054|0.050|
|Number of ifscode|147|145|103|102|102|102|102|102|
|CountryFE<br>Robust standard err<br>*** p<0.01, ** p<0.|Yes<br>ors clustere<br>05, * p<0.1|Yes<br>d by countr|Yes<br>y in parent|Yes<br>heses|Yes|Yes|Yes|Yes|

# Probability of a successful fiscal adjustment

Our results for the probability of fiscal adjustment are reported in Table 5 and Table 6 using the traditional measure of fiscal rigidities, and Table 7 and Table 8 using the structural measure. In general, we find evidence suggesting that budget rigidities affect the probability of fiscal adjustment. This negative

- 21 -
effect is robust to the inclusion of different controls as well as the different methods used to define episodes of fiscal adjustment need. Moreover, in contrast to the case of fiscal need, we do not find evidence of a different impact on the probability of adjustment in the case of emerging economies.

**Economic variables:** In contrast to the case of fiscal adjustment need, we do not find a statistically significant impact of previous GDP growth in any of our specifications. However, we find some evidence of a positive correlation with previous year level of inflation and a negative correlation with the international interest rate. The impact of the interest rate is coherent with previous studies that have documented that consolidation efforts are more likely to be pursued and to succeed if monetary policy stance is eased (Ahrend et al., 2006). The positive association between inflation and the probability of fiscal adjustment is more puzzling.

**Political variables:** Unlike several previous studies, but in line with Mierau et al. (2007) and Wise et al. (2018), our results do not suggest that political-economy variables are robustly related to successful fiscal adjustments. Like us, both take into consideration the panel nature of the data, which may explain the difference with previous papers. We find a negative correlation in the case of the rule of law although not robust to the inclusion of economic factors. Lavigne (2011) argues that lower rule of law could increase the likelihood of adjustment in developing countries by allowing government to take drastic actions sometimes required to adjust their fiscal policy, our results are in line with this hypothesis. The margin of majority appears to increase the probability of fiscal adjustment (see column 4 in Table 6 and Table 8), but the result is statistically significant only when we use debt/revenue to identify episodes of need.

**Interactions** : as we do in the case of fiscal need, we estimate models that allow for non-linearities in the impact of budget rigidities on the probability of fiscal adjustment. We find some, although weak, evidence of nonlinearities. The effect of budget rigidities appears to be weakened with higher rule of law (see column 7 in Table 5 and Table 7) and higher margin of majority (see column 8 in Table 5). On the other hand, income inequality seems to strengthen the effect of rigidities (see column 6 in Table 5 and Table 7).

**Composition** : when we estimate models that consider the wage bill and social security expenditure separately (see Table 22 and Table 23 in the appendix), we find that social security expenditure appears to be more robustly associated with a decrease in the probability of fiscal adjustment. The coefficient associated with the wage component is not statistically significant in any of

- 22 -
our regressions. This result is robust across all our specifications and holds using the traditional measure of rigid expenditure as well as the structural one.

Table 5

|Dependent variable: F|iscal adjus|tment whe|n needed b|ased on Esc|olano et a|l.(2014)|||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure|-0.014|-0.023***|-0.014|-0.027***|-0.016*|0.073**|-0.080***|-0.062***|
|(% of GDP)|(0.014)|(0.008)|(0.013)|(0.008)|(0.008)|(0.028)|(0.028)|(0.019)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-0.043||0.479|0.520|0.443|0.400|0.436|
|||(1.337)||(1.418)|(1.392)|(1.393)|(1.419)|(1.416)|
|Inflation (t-1)||2.500***||2.721**|3.068***|2.991***|3.219***|2.570**|
|||(0.844)||(1.098)|(1.114)|(1.084)|(1.000)|(1.173)|
|U.S. Interest rate||-0.122**<br>(0.051)||-0.157**<br>(0.063)|-0.175** <br>(0.072)|-0.204*** <br>(0.059)|-0.192** <br>(0.072)|-0.172***<br>(0.051)|
|**Political factors**|||||||||
|Gini|||0.010|0.012|0.014|0.079***|0.014|0.005|
||||(0.010)|(0.012)|(0.012)|(0.023)|(0.012)|(0.011)|
|Rule of law|||-0.214***|0.091|0.140|0.160|-0.124|0.090|
||||(0.068)|(0.131)|(0.146)|(0.133)|(0.127)|(0.132)|
|Margin of Majority|||0.516|0.250|0.236|0.451|0.243|-1.486*|
||||(0.406)|(0.385)|(0.379)|(0.360)|(0.375)|(0.800)|
|Election's year|||-0.111|-0.093|-0.085|-0.074|-0.084|-0.079|
||||(0.081)|(0.078)|(0.075)|(0.074)|(0.078)|(0.081)|
|**Interactions**|||||||||
|EMEs * Rigidity|||||-0.032<br>(0.029)||||
|Gini * Rigidity||||||-0.003***<br>(0.001)|||
|Rule of law * Rigidity|||||||0.012**<br>(0.005)||
|Majority * Rigidity||||||||0.072*<br>(0.041)|
|Constant|0.611|1.167***|0.758|0.456|0.349|-2.486**|1.414|1.601*|
||(0.393)|(0.288)|(0.675)|(0.923)|(0.860)|(1.225)|(0.910)|(0.931)|
|Observations|185|183|165|163|163|163|163|163|
|R-squared|0.007|0.114|0.073|0.159|0.167|0.191|0.177|0.187|
|Number of ifscode|60|60|53|53|53|53|53|53|
|CountryFE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Robust standard error<br>***p<0.01,**p<0.05|s clustere<br>,*p<0.1|d by country|in parenth|eses|||||

- 23 -
Table 6

|Dependent variable:|Fiscal adju|stment wh|en needed|based on d|ebt/revenu|e|||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure|-0.004|-0.007|-0.009*|-0.012**|-0.013|-0.009|-0.020*|-0.026**|
|(% of GDP)|(0.003)|(0.004)|(0.005)|(0.005)|(0.010)|(0.015)|(0.012)|(0.010)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-0.329||-0.230|-0.238|-0.227|-0.209|-0.225|
|||(0.274)||(0.482)|(0.487)|(0.483)|(0.485)|(0.483)|
|Inflation (t-1)||0.038||0.098|0.096|0.100|0.101|0.084|
|||(0.084)||(0.164)|(0.163)|(0.164)|(0.167)|(0.164)|
|U.S. Interest rate||-0.023**||-0.028**|-0.027*|-0.028**|-0.030**|-0.028**|
|||(0.011)||(0.013)|(0.014)|(0.014)|(0.014)|(0.014)|
|**Political factors**|||||||||
|Gini|||0.004|0.004|0.004|0.005|0.004|0.004|
||||(0.004)|(0.004)|(0.004)|(0.007)|(0.004)|(0.004)|
|Rule of law|||-0.040|-0.020|-0.020|-0.020|-0.065|-0.020|
||||(0.035)|(0.041)|(0.040)|(0.041)|(0.057)|(0.041)|
|Margin of Majority|||0.221*|0.220*|0.220*|0.218*|0.223*|-0.166|
||||(0.132)|(0.129)|(0.129)|(0.130)|(0.129)|(0.206)|
|Election's year|||-0.042|-0.048|-0.048|-0.048|-0.048|-0.047|
||||(0.030)|(0.031)|(0.031)|(0.031)|(0.031)|(0.030)|
|**Interactions**|||||||||
|EMEs * Rigidity|||||0.002<br>(0.012)||||
|Gini * Rigidity||||||-0.000<br>(0.000)|||
|Rule of law * Rigidit|||||||0.002<br>(0.003)||
|Majority * Rigidity||||||||0.023<br>(0.014)|
|Constant|0.303***|0.479***|0.352|0.445|0.449|0.396|0.617*|0.678**|
||(0.079)|(0.117)|(0.301)|(0.298)|(0.301)|(0.350)|(0.322)|(0.309)|
|Observations|1,121|1,081|771|755|755|755|755|755|
|R-squared|0.001|0.009|0.012|0.022|0.022|0.022|0.022|0.026|
|Number of ifscode|147|145|103|102|102|102|102|102|
|CountryFE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Robust standard err<br>*** p<0.01, ** p<0.|ors clustere<br>05, * p<0.1|d by count|ry in paren|theses|||||

- 24 -
Table 7

|Dependent variable: Fisca<br>Variables|l adjustme<br>(1)|nt when ne<br>(2)|eded based<br>(3)|on Escolan<br>(4)|o et al.(20<br>(5)|14)<br>(6)|(7)|(8)|
|---|---|---|---|---|---|---|---|---|
|Rigid expenditure minus|-0.032***|-0.030***|-0.033***|-0.034***|-0.023***|0.082**|-0.096***|-0.066|
|structural as % GDP|(0.011)|(0.008)|(0.010)|(0.010)|(0.006)|(0.034)|(0.033)|(0.050)|
|**Economic factors**|||||||||
|GDP growth (t-1)||0.057||0.165|0.217|0.143|0.185|0.160|
|||(1.317)||(1.502)|(1.481)|(1.470)|(1.491)|(1.515)|
|Inflation (t-1)||2.770***||3.252***|3.540***|3.537***|3.575***|3.209**|
|||(0.812)||(1.182)|(1.170)|(1.137)|(1.137)|(1.218)|
|U.S. Interest rate||-0.136***<br>(0.051)||-0.147**<br>(0.065)|-0.158** <br>(0.066)|-0.163*** <br>(0.060)|-0.169**<br>(0.069)|-0.154**<br>(0.059)|
|**Political factors**|||||||||
|Gini|||0.006|0.005|0.004|0.028**|0.005|0.004|
||||(0.009)|(0.013)|(0.013)|(0.014)|(0.013)|(0.012)|
|Rule of law|||-0.208***|0.106|0.141|0.150|0.049|0.114|
||||(0.068)|(0.137)|(0.137)|(0.134)|(0.127)|(0.137)|
|Margin of Majority|||0.385|0.155|0.106|0.228|0.114|-0.342|
||||(0.386)|(0.376)|(0.375)|(0.359)|(0.371)|(0.621)|
|Election's year|||-0.110|-0.083|-0.071|-0.052|-0.079|-0.080|
||||(0.079)|(0.077)|(0.072)|(0.073)|(0.075)|(0.080)|
|**Interactions**|||||||||
|EMEs * Deviation|||||-0.040<br>(0.025)||||
|Gini * Deviation||||||-0.003***<br>(0.001)|||
|Rule of law * Deviation|||||||0.013**<br>(0.006)||
|Majority * Deviation||||||||0.058<br>(0.096)|
|Constant|0.583***|0.893***|0.968|0.270|0.308|-0.810|0.689|0.589|
||(0.130)|(0.190)|(0.667)|(0.937)|(0.919)|(0.979)|(0.930)|(0.845)|
|Observations|182|180|164|162|162|162|162|162|
|R-squared|0.035|0.157|0.100|0.180|0.190|0.211|0.194|0.184|
|Number of ifscode|60|60|53|53|53|53|53|53|
|CountryFE<br>Robust standard errors cl<br>***p<0.01,**p<0.05,*|Yes<br>ustered by<br>p<0.1|Yes<br>country in p|Yes<br>arentheses|Yes|Yes|Yes|Yes|Yes|

- 25 -
Table 8

|Dependent variable: Fisca|l adjustmen|t when nee|ded based|on debt/rev|enue||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure minus|-0.009*|-0.012**|-0.017***|-0.020***|-0.021**|-0.017|-0.017|-0.046**|
|structural as % GDP|(0.005)|(0.006)|(0.006)|(0.006)|(0.010)|(0.023)|(0.019)|(0.020)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-0.277||-0.219|-0.229|-0.218|-0.225|-0.236|
|||(0.327)||(0.527)|(0.533)|(0.528)|(0.535)|(0.528)|
|Inflation (t-1)||0.041||0.083|0.081|0.084|0.082|0.053|
|||(0.085)||(0.167)|(0.166)|(0.167)|(0.166)|(0.167)|
|U.S. Interest rate||-0.026**||-0.031**|-0.030**|-0.031**|-0.030**|-0.031**|
|||(0.010)||(0.013)|(0.014)|(0.013)|(0.015)|(0.014)|
|**Political factors**|||||||||
|Gini|||0.004|0.004|0.004|0.005|0.004|0.005|
||||(0.005)|(0.004)|(0.004)|(0.005)|(0.004)|(0.004)|
|Rule of law|||-0.054|-0.028|-0.029|-0.028|-0.023|-0.032|
||||(0.039)|(0.045)|(0.045)|(0.045)|(0.053)|(0.045)|
|Margin of Majority|||0.314**|0.312**|0.311**|0.311**|0.311**|0.033|
||||(0.142)|(0.138)|(0.138)|(0.139)|(0.138)|(0.186)|
|Election's year|||-0.045|-0.051|-0.050|-0.051|-0.051|-0.050|
||||(0.032)|(0.032)|(0.032)|(0.032)|(0.032)|(0.032)|
|**Interactions**|||||||||
|EMEs * Deviation|||||0.003<br>(0.013)||||
|Gini * Deviation||||||-0.000<br>(0.001)|||
|Rule of law * Deviation|||||||-0.001<br>(0.005)||
|Majority * Deviation||||||||0.044<br>(0.030)|
|Constant|0.310***|0.438***|0.264|0.315|0.314|0.299|0.295|0.487*|
||(0.041)|(0.065)|(0.288)|(0.283)|(0.282)|(0.291)|(0.302)|(0.293)|
|Observations|1,015|1,003|713|709|709|709|709|709|
|R-squared|0.003|0.013|0.022|0.033|0.034|0.034|0.034|0.037|
|Number of ifscode|137|137|98|98|98|98|98|98|
|CountryFE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Robust standard errors cl<br>***p<0.01,**p<0.05,*|ustered by c<br>p<0.1|ountry in p|arentheses||||||

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# VI. Robustness checks

We evaluate the robustness of our findings by estimating six sets of regressions that either slightly modify the way in which we construct the dependent variable in our baseline specifications or keep the dependent variable but change the estimator.

First, we estimate the same econometric specifications using a pooled logistic regression instead of a linear probability model.<sup>6</sup> We find qualitatively similar results in the case of fiscal adjustment need (Table 24, Table _25_ , Table _26_ , Table _27_ in the Appendix), being again positively correlated with rigid expenditure. The main difference in this exercise is that now the political factors play a greater role. Economic inequality, margin of majority, and election year are all statistically significant with positive sign, while the rule of law is negatively correlated with fiscal adjustment need. We also find that developing economies seems to have higher probability of need, and that margin of majority attenuates the effect of budget rigidities while the rule of law strengthens them. In the case of the probability of fiscal adjustment (Table _28_ , Table _29_ , Table _30_ , and Table 31 in the Appendix), we find that rigid expenditure increases the probability of adjustment, which is at odds with our conceptual framework. This result could be in part driven by the unobserved heterogeneity, which it is not controlled by our pooled estimator. The role of economic factors remains as in our baseline estimation while the political factors again appear to be more relevant compare to the baseline estimation. We find some evidence of nonlinearities with regards to income inequality and rule of law.

Second, we consider the same econometric specifications but instead of using the previous pooled logit estimator, we apply a conditional logit estimator, which attempts to control for the unobserved heterogeneity while staying in the maximum likelihood framework.<sup>7</sup> In the case of fiscal need (Table 32, Table _33_ , Table _34_ , Table 35 in the Appendix), the results are again qualitatively similar with a positive and statistically significant association between adjustment need and rigid expenditure. The economic factors remain as the baseline exercise in terms of sign and statistical significance. The political factors are still significant but less robust across specifications, and we again find some evidence of nonlinearities in the effect of the rigid expenditure. In the case of fiscal adjustment (Table 36, Table _37_ , Table _38_ , and Table 39 in the Appendix), our results are consistent with our baseline linear probability model, and we find the same, although weaker, evidence of a negative relationship between rigid

> 6 Lavigne (2011) among others have estimated their models with this approach (see the summary of the literature in Table 9: Literature review of the Appendix).

> 7 Miearau et al. (2007) apply the same type of estimator to study fiscal adjustment in OECD countries.

- 27 -
expenditure and the probability of fiscal adjustment. It is worth noting that the sign of the effect of budget rigidities switches from positive to negative when we control for unobserved heterogeneity, in other words, when we move from a pooled logit model to a conditional logit or linear probability model with fixed effects. The role of economics factors, political factors, and nonlinearities is also consistent with our baseline specification, which supports our claim that unobserved heterogeneity could be driven the results in the pooled logit estimator. Moreover, it is also worth noting that the negative effect of rigid expenditures is only statistically significant when we use the structural measure.

Third, given that we identify episodes of fiscal adjustment conditional on having fiscal need and use only those years, as a robustness check, we also attempt to control for sample selection in our estimation of the determinants of fiscal adjustment. We do so by using the Heckman two-step correction for sample selection bias in which we assume that election year affects the probability of fiscal adjustment need but does not affect the probability of fiscal adjustment. The results of this exercise are like the pooled logit estimator that does not correct for sample selection and show either a positive or an insignificant relationship between rigid expenditure and fiscal adjustment (see Table 40, Table _41_ , Table _42_ , and Table _43_ in the Appendix). In this model, as in the pooled logit regression, we do not account for unobserved heterogeneity because the second step uses a pooled probit model that does not allow fixed effects, so our result again is likely driven by this factor.

Fourth, we estimate our baseline specifications for fiscal adjustment controlling for a measure of the size of the need of fiscal adjustment using a one year lagged value of the primary gap. Our results are consistent with our baseline models, we find a negative relationship that is statistically significant and robust when we identify fiscal adjustment need using primary gap or debt over revenue (see Table 44, Table _45_ , Table _46_ , and Table 47 in the Appendix).

Fifth, we estimate our baseline specifications with ordinary least squares but using episodes of fiscal need and fiscal adjustment identified as in Lavigne (2011), detailed in the literature review provided in the Appendix, which results in a lower number of events. The results are qualitatively similar. In the case of fiscal need (Table 48 and Table _49_ in the Appendix), we confirm the positive association with rigid expenditure, the lack of significance for most of the political factors and that the results for the economic variables continue to hold but the effect of economic growth is weaker. In the case of fiscal adjustment, we find the expected negative sign for rigid expenditure (Table 50 and Table 51 in the Appendix), which again is statistically significant and in contrast to our baseline models, we find that election year decreases

- 28 -
the probability of adjustment significantly. Lastly, unlike our baseline specification, we do not find evidence of nonlinearities in the effect of rigid expenditure.

Sixth, we estimate the model using a linear probability model identifying the episodes of need with a measure of primary gap under stressed conditions (see Kose et al., 2017), which results in a larger number of episodes. The results are qualitatively similar for the need of fiscal adjustment (Table 52 and Table _53_ in the Appendix), with rigid expenditure being positively associated to need. Among the economic factors, economic growth remains as in our baseline models, but previous inflation rate and interest rate are negatively correlated. Among the political factors, only rule of law is significantly correlated with need in some of the specifications. In the case of fiscal adjustment (Table _52_ Table _54_ and Table _55_ in the Appendix), we confirm our baseline results and find evidence that rigid expenditure reduces the probability of adjustment, however only when we use the structural measure of rigidity. Moreover, growth and the interest rate are negatively associated to the probability fiscal adjustment, as we expected. In contrast with our baseline estimation, we find statistical evidence that income inequality and the rule of law increase the likelihood of adjustment. In addition, we find some evidence of nonlinearities as the impact of rigid expenditure is attenuated by margin of majority.

# VII. Conclusion

This paper was motivated by the fact that many Latin American countries are facing significant challenges to adjust their fiscal deficits. Consecutive years of large fiscal deficits contributed to sharp increases in the public debt. To bring their debt back to a sustainable path, some countries in the region need to reduce government expenditures or find new sources of revenues. However, many policy makers claim that is hard to reduce spending, as a large portion of it is explained by salaries of public employees, pensions and interest payments, all components that are rigid in the short run.

This paper contributes to the existing literature by looking at how budget rigidities affect the probability that governments get into fiscal distress and the probability that they initiate successful fiscal adjustment while they are in need. It considers the effect of budget rigidities not only during periods of fiscal adjustment, but also during periods when governments should be making fiscal efforts and fail to do so, as well as periods when no adjustment is required. Unlike several previous studies, but in line with Wise et al. (2018), our results do not suggest that political-economy variables are robustly related to successful fiscal adjustments. However, we do find evidence that budget rigidities can constrain fiscal

- 29 -
consolidation, especially when the rigid components (wages and pensions) are above what the structure of their economies would demand.

The key findings are that relatively high shares of rigid (observed) components of public spending (wages, pensions and interests) contribute to getting countries into fiscal distress and are a constraint for fiscal consolidation. This could come as a surprise, as many advanced economies with relatively high shares of rigid spending have had successful fiscal consolidations. Nonetheless, we find evidence that a relatively high share of non-structural rigid spending (when spending on public wages and pensions is above what the fundamentals of their economy would suggest) contributes to the probability of fiscal distress and reduces the probability of fiscal consolidation, which is stronger relative to the use of a traditional measure of rigid expenditure. Moreover, the effect of rigid expenditure seems to be more relevant for economies with high income inequality, governments with lower margin of majority and countries with lower institutional quality. Finally, we also find some evidence that higher expenditure in pensions reduces the probability of fiscal adjustment more robustly than higher expenditure in wages.

- 30 -
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# Appendix 1: Literature Review

## **Table 9: Literature review**

|**Paper**|**Fiscal Adjustment**|**Succesful fiscal adjustment**|**Multivariate analysis?**|**Sample**|
|---|---|---|---|---|
|Alesina and<br>Perotti<br>(1995)|Blanchard Fiscal Impulse (BFI) is<br>less than 1.5% of GDP|Three years after the adjustment the gross debt to GDP<br>ratio is at least 5 percentage points lower|No.|20 (OECD),<br>1960-92|
|McDermott<br>and Wescott<br>(1996)|<br>CAPB improves by at least 1.5%<br>over two years and does not<br>decrease in either of those years|Reduction of at least 3 (or 5) percentage points of debt<br>to GDP ratio in second (or third) year after the<br>adjustment.|Logit model, conditional<br>on adjustment taking<br>place.|<br>20 (OECD),<br>1970-95|
|Alesina and<br>Perotti<br>(1997)|BFI falls by more than 1.5% of<br>GDP of a period of two<br>consecutive years in which BFI<br>falls by at least 1.25% per year in<br>both years.|If either (i) in the three years after the adjustment the<br>ratio of the CAPB (as % of GDP) is on average at least 2%<br>below the last year of adjustment (ii) three years after<br>the adjustment the debt to GDP ratio is 5% below the<br>level of the last year of the adjustment|<br>No.|20 (OECD),<br>1960-94|
|Alesina and<br>Ardagna<br>(1998)|<br>CAPB (as % of GDP) improves by<br>at least 2%, or a period of two<br>consecutive years in which the<br>CAPB improves by at least 1.5%<br>per year, in both years.|<br>If either (i) in the three years after the adjustment, the<br>ratio of the CAPB (as % of GDP) is on average at least 2<br>percentage points below its value in the year of<br>adjustment, or (ii) three years after adjustment,<br>government debt (as % of GDP) is 5 percentage points<br>below its level in the adjustmnet year.|Probit model for<br>success, conditional on<br>adjustment taking<br>place, but do not<br>include spending and<br>revenues<br>simultaneously.|20 (OECD),<br>1960-96|
|Alesina et al.<br>(1998)|<br>The ratio of the primary deficit to<br>GDP is reduced by at least 1.5%|If (i) either in the three years following the adjustment<br>year, the deficit-to-GDP ratio is on average at least 2<br>percentage points below its level in the adjustment<br>year; or (ii) three years after the adjustment, the debt-<br>to-GDP ratio is at least 5 percentage points below its<br>level in the adjustment year.|Only probit estimates<br>for consequences of<br>fiscal adjustments on<br>political economy<br>variables. All years<br>included, or all years<br>where the change om<br>the deficit is positive.|19 (OECD),<br>1960-95|
|Haylen and<br>Everaert<br>(2000)|Periods of at least two<br>consecutive years when the CAPB<br>(as % of GDP) improved by at<br>least 2%. Furthermore, in the first<br>year of consolidation period the<br>CAPB improves by at least 0.25%,<br>whereas in all other years its|These authors do not define succesful adjustments but<br>estimate model for the change in the debt/GDP ratio as<br>dependent variable.|<br>OLS estimates using<br>periods when<br>adjustment took place.|19 (OECD),<br>1960-98|
||change is positive||||
|von Hagen<br>et al.<br>(2001,2002)|.<br>The cyclically adjusted (total)<br>government budget balance<br>increases by at least 1.25% of<br>cyclically adjusted GDP in two<br>consecutive years, or the cyclically<br>adjusted budget balance increase<br>by at least 1.5% of cyclically<br>adjusted GDP in one year and was<br>positive but perhaps less than<br>1.25% in both the preceding and<br>subsequent year.|Two years after the initial adjustment, the government<br>budget balance stands at no less than 75% of the<br>balance in the first year of the consolidation episode.|Probit models for<br>succesful adjustments<br>(but do not include<br>spending and revenue<br>changes)|20 (OECD),<br>1960-98|
|Mulas-<br>Granados<br>(2003)|<br>CAPB increases by at least 1.25%<br>of GDP in two consecutive years,<br>or if the change in CAPB exceeded<br>1.5% of GDP in one year and was<br>less than 1.25% of GDP in the<br>flli th dt|NA.|FE models by<br>component and LPM.|15 (EU), 1970-<br>01|
|Baldacci et<br>al. (2004)|oowng or e preceen year.<br>Year (or set of years) in which the<br>general government primary<br>budget balance improves by at<br>least 0.5% of GDP per year.|Primary balance exceeds the sustainability threshold at<br>least for one year during the adjustment episode or<br>during the following two years. A country's fiscal<br>position is deemed sustainable when its primary<br>balance is such that debt stock is not increasing as a<br>share of GDP.|Probit model to<br>determine the<br>contribution of<br>economic and political<br>factors in succesful<br>fiscal adjustments.|25 emerging<br>market<br>economies,<br>1980-01|

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**Table A0: Literature review (continuation)**

|**Paper**|**Fiscal Adjustment**|**Succesful fiscal adjustment**|**Multivariate analysis?**|**Sample**|
|---|---|---|---|---|
|Tavares<br>(2004)|The change in the primary deficit<br>is -1.5% of GDP or less.|If the total change in the primary deficit in the 3 years<br>after the adjustment is -1% (or less) of GDP or, 3 years<br>after the initial adjustment year, the debt-to-GDP ratio<br>is 5% below its level before the adjustment.|Probit model . Only<br>adjustment periods<br>considered.|19 (OECD),<br>1960-95|
|Ardagna<br>(2004)|The CAPB must increase by at<br>least 1.5% of potential GDP over<br>two years and not decrease.|A succesful fiscal stabilization is an episode in which the<br>CAPB improves, and, 2 years after, the debt-to-GDP<br>ratio is at least 3% lower than in the year of the fiscal<br>tightening.|<br>Probit model, but<br>sample also includes<br>years without<br>adjustment.|17 (OECD),<br>1975-02|
|Ahrend et al.<br>(2006)|<br>CAPB increases by at least 1% of<br>GDP in one year or over two<br>consecutive years with at least<br>0.5% in the first year.|Classified as seriously pursued if in the two years<br>following the adjustment an additional adjustment of at<br>least 1% of GDP is achieved. Success based on the<br>cumulative adjustment.|<br>Probit and FE estimator<br>using cumulative CAPB<br>changes.|<br>24 (OECD),<br>1980-05|
|Tsibouris et<br>al. (2006)|Any year or succession of years of<br>uninterrupted improvement in<br>the fiscal primary balance.|Episodes in which reversals over the first three post-<br>adjustment years were less than 1/5 of the total<br>adjustment.|Case studies and<br>success rates.|165, 1971-01|
|Guichard et<br>al. (2007)|Starts if the CAPB improves by at<br>least 1% of potential GDP in one<br>year or in two consecutive years<br>with at least 0.5% improvement<br>occuring in the first of the two<br>years. Contines as long as CAPB<br>improves allowing deterioration<br>of no more than 0.3% in one year<br>offset by 0.5% improvement next<br>year and stop when CAPB stops<br>increasing or improves less than<br>0.2% of GDP in one year and then<br>deteriorates.|NA.|Probit.|24 (OECD),<br>1978-05|
|Miearau et<br>al. (2007)|1) An improvement of the CAPB<br>by 1.25% points in two<br>consecutive years or an<br>improvement of 1.5% points of<br>the budget balance preceded by a<br>positive change in the budgetary<br>position. 2) Any period starting<br>with an improvement of the<br>budget balance by at least 0.25%<br>in the first year, with a minimum<br>duration of 2 years and a total<br>improvement of 2%.|NA.|Conditional FE logit.|20 (OECD),<br>1970-03|
|Schaltegger<br>and Feld<br>(2009)|<br>A period of fiscal adjustment is<br>defined as a year in which the<br>(cantonal and local) primary<br>balance per GDP improves by at<br>least 1%, or a period of two<br>consecutive years in which the<br>primary balance improves by at<br>least 0.8%, in both years.|A period of fiscal adjustment is succesful if, in the three<br>years after adjustment, the (cantonal and local) primary<br>balance improved on average by at least 0.5%.|<br>Probit model, but<br>sample also includes<br>years without<br>adjustment.|Swiss<br>cantons, 1981-<br>01|
|Alesina and<br>Ardagna<br>(2010)|<br>A period of fiscal adjustment<br>(stimulus) is a year in which the<br>CAPB improves (deteriorates) by<br>at least 1.5% of GDP.|If the cumulative reduction of the debt-to-GDP ratio 3<br>years after the beginning of a fiscal adjustment is<br>greater than 4.5% (the value of the 25th percentile of<br>the change of the debt-to-GDP ratio empirical density in<br>all episodes of fiscal adjustments).|<br>OLS, growth regressions<br>using only periods<br>where an adjustment<br>took place.|<br>OECD, 1970-<br>07|
|Biggs et al.<br>(2010)|CAPB improves by at least 1.5% of<br>GDP and data of Devries et al.<br>(2011).|Debt to potential GDP ratio has declined three years<br>following the first year of the consolidation by at least<br>4.5%.|No.|21 [15]<br>(OECD), 1970-<br>07 [1980-07]|

- 35 -
# **Table A0: Literature review (continuation)**

|**Paper**<br>Barrios et al|**Fiscal Adjustment**<br> <br>Imrovement of at least 15%|**Succesful fiscal adjustment**<br>If it brins down the ublic debt level b at least 5% of|**Multivariate analysis?**<br>Two-stae robit|**Sample**<br>27 (EU) lus 8|
|---|---|---|---|---|
|.<br>(2010)|<br>p .<br>taking place in one single year or<br>taking place over three years if<br>each and every year the CAPB<br>does not deteriorate by more<br>than 0.5% of GDP.|g p y<br>GDP in the three years following the attempt.|g p.|p<br>(OECD), 1970-<br>08|
|Arin et al.<br>(2011)|Attempts are episods where the<br>Blanchard fiscal impulse (BFI) is<br>above 1.5%. BFI measures the<br>difference between a year CAPB<br>and the unadjusted primary<br>balance of the year before.|If at least one of the two criteria holds: 1) in the three<br>years after the attempt, the ratio of cyclically adjusted<br>primary deficit to GDP is on average at least 2% of GDP<br>below the attempt year and 2) three years after the<br>attempt, the ratio of debt to GDP is at least 5% of GDP<br>below the level of the attempt year, as suggested by<br>Ali d Ptti 1997|Probit model and IV<br>regression with an<br>instrument that varies<br>only across countries.|28 (OECD),<br>1978-07|
|Lavigne<br>(2011)|Need when cumulative total of<br>central government deficits over<br>the past five years is greater than<br>or equal to 20% of GDP. An<br>adjustment is defined as a<br>continuous positive change in the<br>primary balance amounting to at<br>least 1.5% of GDP over a period of<br>|esna an ero .<br>NA.|Logit model.|60 advanced<br>and<br>developing,<br>1985-02|
|Molnar<br>(2012)|5 years.<br>5 def. using underlying CAPB 1)<br>continuous improvement in<br>budget balance, 2) 1% fall in<br>budget balance/GDP in a single<br>year or in two years with at<br>minumum 0.5 in the first year, 3)<br>1.5 fall in one or two year with at<br>minimum 1.25 in each, 4) 1.5 fall<br>in a single year or three with less<br>than 0.5 deterioration in any year,<br>5) 2% fall in a single year or in two|Three definitions are used: debt stabilises 1) the year<br>after 2) two years after 3) three years after the episode<br>ends.|Probit, duration,<br>truncated regression<br>and bivariate Heckman<br>selection models.|28 (OECD),<br>1960-09|
||with a minimum of 15 in each||||
|Baldacci et<br>al. (2012)|. .<br>Authors do not provide definition<br>of fiscal adjustments as their<br>analysis focuses on public debt<br>reduction, defined as periods of at<br>least two consecutive years of<br>continuos reduction in the ratio of<br>public debt to GDP.|The length of succesful debt consolidation spell is the<br>time interval between periods in which the ratio of debt<br>to GDP declined from a high level to reach the prudent<br>threshold. This threshold is 60% of GDP for advanced<br>economies and 40% of GDP for emerging economies.|<br>Survival analysis of the<br>length of the succesful<br>period.|120, 1980-10|
|Hernandez|A fiscal consolidation episode in a|NA.|OLS and IV regressions|20 (OECD),|
|de Cos and<br>Moral-<br>|given year if the CAPB improves<br>by at least 1.5% of GDP.<br>||concerning<br>expansionary<br>|1994-06|
|Benito<br>(2012)|Alternatively, we also consider the<br>narrative aroach||adjustments.||
|Alfonso and|pp.<br>Four different definitions,|Improvement in the CAPB for two consecutive years is|Logit model.|18 (OECD),|
|Jalles (2012)|including those of Devries et al.<br>(2011)|at least 1 standard deviation of the CAPB in the full<br>panel.||1970-10|
|Alesina and<br>Ardagna<br>(2013)|Either (1): a 2-year period in<br>which the CAPB improves in each<br>year and the cumulative<br>improvement is at least two<br>points of the balance/GDP ratio or<br>(2): a 3-year or more period in<br>wich the CAPB improves in each<br>year and the cumulative<br>improvement is at least 3%|If the debt to GDP ratio is 2 years after the end of a<br>fiscal adjustment is lower than the debt to GDP ratio in<br>the last year of the adjustment.|A growth regression on<br>whether fiscal shocks<br>impact growth (not<br>fiscal adj.). All years are<br>included, not only<br>adjustment years.|21 (OECD),<br>1970-10|
|Holden and<br>Larsson<br>Midthjell<br>(2013)|.<br>A period of fiscal adjustment<br>(stimulus) is a year in which the<br>CAPB improves (deteriorates) by<br>at least 1.5% of GDP.|If the cumulative change in the debt/GDP ratio from the<br>year of adjustment and two years forward is smaller<br>than the 25th percentile of the same variable's density<br>in all episodes of fiscal adjustments. Variables are<br>measured as ratio to GDP for the two years prior to the<br>adjustment, and as ratio to trend GDP for the<br>adjustment year and the two years after the<br>adjustment.|<br>No.|24 (OECD),<br>1970-07|

- 36 -
## **Table A0: Literature review (continuation)**

|**Paper**|**Fiscal Adjustment**|**Succesful fiscal adjustment**|**Multivariate analysis?**|**Sample**|
|---|---|---|---|---|
|Kaplanoglou|Attempts are defined as an|At least one of the two following criteria holds: 1) in the|Logit model.|29 (OECD),|
|et al. (2015)|improvement in the CAPB of at<br>least 1.5% of GDP taking place in<br>one year or taking place over<br>three years, if in each and every<br>year the CAPB does not<br>deteriorate by more than 0.5% of<br>GDP.|three years after the attempt, the ratio of the cyclically<br>adjusted primary deficit to GDP is on average at least<br>2% of GDP below the attempt year, 2) three years after<br>the attempt, the ratio of the debt-to-GDP is at least 5%<br>of GDP below the levelk of the attempt year. (following<br>Alesina Perotti 1997)_||1971-09|
|Gupta et al.<br>(2017)|Updates data of Devries et al.<br>(2011).|Analyses difference between the size of planned fiscal<br>adjustment and the size of the realized fiscal<br>adjustment as measured by changes in the primary<br>budget balance (all expressed in percent of GDP)|Analyses difference<br>between planned and<br>actual fiscal<br>consolidations.|17 (OECD),<br>1978-15|
|Wiese et al.<br>(2018)|BP test on cyclically adjusted fiscal<br>balance to identify the beginning<br>of an adjustment and then it<br>continues as long as the change is<br>positive.|BP test to the growth rate of the debt-to-GDP ratio. If<br>fiscal adjustments are identified prior to, or<br>simultaneously with the beginning of regimes with<br>negative growth rates, and the periods are not more<br>than 4 years apart, we code it as succesful.|Probit model with<br>random effects<br>pretesting using Mudlak<br>approach.|<br>20 (OECD),<br>1967-13|

# Appendix 2: Episodes of fiscal need and fiscal adjustment

**Table 10: Adjustment need in advanced countries under current conditions**

|**Country**|**Begin**|**End**|**Country**|**Begin**|**End**|
|---|---|---|---|---|---|
|Australia|1992|1994|Japan|1994|1996|
|Australia|2010|2010|Japan|1999|2014|
|Austria|1994|1996|Latvia|2010|2010|
|Canada|1991|1994|Lithuania|2010|2010|
|Cyprus|2010|2013|Netherlands|2010|2012|
|Czech Republic|2001|2003|New Zealand|2010|2011|
|Czech Republic|2010|2010|Norway|1993|1994|
|Estonia|2009|2009|Portugal|1994|1994|
|Finland|1992|1996|Portugal|2005|2005|
|France|1992|1997|Portugal|2010|2014|
|France|2010|2010|Slovak Republic|2001|2002|
|Germany|1996|1997|Slovak Republic|2010|2010|
|Germany|2003|2003|Slovenia|2010|2013|
|Greece|1993|1993|Spain|1993|1995|
|Greece|2009|2015|Spain|2009|2014|
|Iceland|1993|1993|Sweden|1993|1995|
|Iceland|2009|2010|United Kingdom|1992|1995|
|Ireland|2009|2013|United Kingdom|2009|2013|
|Israel|2003|2003|United States|2009|2012|

**Table 11: Adjustment need in developing countries under current conditions**

|**Country**|**Begin**|**End**|**Country**|**Begin**|**End**|
|---|---|---|---|---|---|
|Angola|2015|2015|India|2012|2012|
|Argentina|1996|1996|Iraq|2014|2016|
|Argentina|1999|2004|Jordan|2012|2014|

- 37 -
|Armenia|2016|2016|Kazakhstan|2016|2016|
|---|---|---|---|---|---|
|Azerbaijan|2016|2016|Lebanon|1999|2001|
|Belarus|2016|2016|Mongolia|2014|2016|
|Belize|2013|2013|Morocco|2012|2012|
|Belize|2016|2017|Mozambique|2001|2001|
|Bolivia|1999|2003|Mozambique|2010|2010|
|Bolivia|2016|2017|Mozambique|2015|2016|
|Botswana|2004|2004|Namibia|2015|2016|
|Botswana|2008|2013|Nigeria|1999|1999|
|Botswana|2016|2017|Nigeria|2016|2016|
|Bulgaria|2010|2010|Pakistan|2013|2013|
|Bulgaria|2015|2015|Paraguay|1998|2002|
|Cameroon|2015|2017|Philippines|2001|2001|
|Colombia|1999|1999|Poland|2010|2010|
|Côte d'Ivoire|2000|2008|Romania|2010|2010|
|Croatia|2010|2015|Russian Federation|2016|2016|
|Ecuador|1996|1996|Saudi Arabia|2002|2002|
|Ecuador|1999|2000|Senegal|2000|2001|
|Ecuador|2014|2017|Senegal|2010|2015|
|Egypt, Arab Rep.|2003|2004|Serbia|2010|2010|
|Egypt, Arab Rep.|2012|2017|Serbia|2015|2015|
|El Salvador|2010|2010|South Africa|2013|2016|
|Ethiopia|1998|2002|Trinidad & Tobago|2015|2017|
|Gabon|2016|2016|Tunisia|2016|2017|
|Georgia|2010|2010|Ukraine|2014|2014|
|Georgia|2014|2016|Uruguay|2002|2002|
|Guatemala|2000|2000|Vanuatu|2001|2002|
|Honduras|2003|2003|Vanuatu|2015|2017|
|Honduras|2010|2010|Venezuela, RB|2012|2015|
|Honduras|2013|2013|Vietnam|2013|2016|
|India|1997|2002|Zambia|2015|2015|

**Table 12: Adjustment status in advanced countries using current conditions**

|**Country**|**Begin**|**End**|**Country**|**Begin**|**End**|
|---|---|---|---|---|---|
|Cyprus|2012|2013|Netherlands|2010|2012|
|France|1994|1997|Norway|1993|1994|
|Germany|1996|1997|Portugal|2011|2013|
|Greece|2010|2013|Spain|2010|2014|
|Iceland|2009|2010|Sweden|1994|1995|
|Ireland|2011|2013|United Kingdom|1994|1995|
|Japan|2004|2007|United Kingdom|2010|2011|
|Japan|2011|2014|United States|2010|2012|

**Table 13: Adjustment status in developing countries using current conditions**

|**Country**|**Begin**|**End**|**Country**|**Begin**|**End**|
|---|---|---|---|---|---|
|Argentina|2002|2004|Egypt, Arab Rep.|2016|2017|

- 38 -
|Belize|2016|2017|Georgia|2015|2016|
|---|---|---|---|---|---|
|Bolivia|1999|2000|India|1999|2000|
|Botswana|2010|2013|Mozambique|2015|2016|
|Botswana|2016|2017|Paraguay|1998|1999|
|Côte d'Ivoire|2000|2001|Senegal|2014|2015|
|Côte d'Ivoire|2007|2008|South Africa|2013|2015|
|Croatia|2012|2014|Vanuatu|2001|2002|
|Ecuador|1999|2000|Vietnam|2014|2015|

**Table 14: Adjustment need in developed countries using debt/revenue ratio**

|**Country**|**Begin**|**End**|**Country**|**Begin**|**End**|
|---|---|---|---|---|---|
|Australia|1993|1999|Korea, Rep.|2005|2007|
|Australia|2012|2017|Korea, Rep.|2010|2010|
|Austria|1995|1996|Korea, Rep.|2014|2017|
|Austria|2010|2016|Latvia|2010|2017|
|Belgium|1992|1999|Lithuania|2000|2001|
|Belgium|2012|2016|Lithuania|2010|2016|
|Canada|1994|1999|Luxembourg|1996|1998|
|Canada|2010|2017|Luxembourg|2009|2017|
|Cyprus|2003|2005|Malta|1999|1999|
|Cyprus|2013|2017|Malta|2004|2005|
|<br>Czech Republic|2002|2004|Malta|2010|2014|
|Czech Republic|2010|2015|Netherlands|1991|1998|
|Denmark|1994|1999|Netherlands|2010|2016|
|Denmark|2011|2014|New Zealand|1991|1995|
|Estonia|1996|1997|New Zealand|2011|2016|
|Estonia|2003|2003|Norway|1992|1994|
|Estonia|2013|2017|<br>Norway|2004|2010|
|Finland|1994|1998|Norway|2017|2017|
|Finland|2011|2017|Portugal|1991|1991|
|France|1996|1999|Portugal|1995|1996|
|France|2010|2017|Portugal|2011|2017|
|Germany|1996|1999|Singapore|1992|1992|
|<br>Germany|2005|2005|<br>Singapore|1999|1999|
|Germany|2010|2014|Singapore|2002|2005|
|Greece|1994|1997|Singapore|2009|2013|
|Greece|2001|2001|Singapore|2017|2017|
|Greece|2011|2017|Slovak Republic|2000|2004|
|Hong Kong SAR, China|2002|2002|Slovak Republic|2012|2017|
|Hong Kong SAR, China|2005|2005|Slovenia|2001|2002|
|Iceland|1994|1997|Slovenia|2013|2017|
|Iceland|2009|2014|Spain|1994|2000|
|Ireland|1991|1997|<br>Spain|2012|2017|
|Ireland|2011|2014|Sweden|1994|1999|
|Israel|2002|2006|Sweden|2015|2016|
|Italy|1994|1999|Switzerland|1995|2000|
|Italy|2011|2017|Switzerland|2003|2005|

- 39 -
|Japan|2000|2005|United Kingdom|1994|1998|
|---|---|---|---|---|---|
|Japan|2010|2017|United Kingdom|2010|2017|
|Korea, Rep.|1991|1991|United States|2010|2017|

**Table 15: Adjustment need in developing countries using debt/revenue ratio**

|**Country**|**Begin**|**End**|**Country**|**Begin**|**End**|
|---|---|---|---|---|---|
|Afghanistan|2003|2005|Lesotho|1993|1994|
|Albania|1998|2000|Lesotho|1999|2002|
|Albania|2014|2017|Liberia|2001|2007|
|Algeria|1995|1996|Macedonia, FYR|2001|2005|
|Algeria|1999|2000|Macedonia, FYR|2013|2017|
|Algeria|2017|2017|Madagascar|1992|1993|
|Angola|2001|2004|Madagascar|1999|2005|
|Angola|2016|2017|Madagascar|2017|2017|
|Antigua & Barbuda|1991|1991|Malawi|2003|2005|
|Antigua & Barbuda|1999|2004|Malawi|2014|2017|
|Antigua & Barbuda|2014|2015|Malaysia|1991|1993|
|Argentina|2003|2006|Malaysia|2004|2004|
|Argentina|2016|2017|Malaysia|2010|2017|
|Armenia|1997|2003|Maldives|2002|2002|
|Armenia|2010|2017|Maldives|2010|2017|
|Azerbaijan|2000|2004|Mali|2001|2001|
|Azerbaijan|2016|2017|Mali|2004|2005|
|<br>Bahamas, The|1994|1998|Mali|2016|2017|
|Bahamas, The|2011|2017|Marshall Islands|2002|2009|
|Bahrain|1999|2004|Mauritania|2001|2005|
|Bahrain|2016|2017|Mauritania|2016|2017|
|Bangladesh|2004|2009|Mauritius|2003|2005|
|Barbados|1996|1996|Mauritius|2011|2011|
|Barbados|2010|2017|Mauritius|2014|2017|
|Belarus|2010|2012|Mexico|1999|1999|
|Belarus|2016|2017|Mexico|2003|2003|
|Belize|2004|2007|Mexico|2014|2017|
|Belize|2017|2017|Micronesia, Fed. States|1996|1999|
|Benin|2000|2002|Micronesia, Fed. States|2009|2011|
|Benin|2016|2017|Micronesia, Fed. States|2014|2014|
|Bhutan|1994|1994|Moldova|1999|2002|
|Bhutan|2003|2006|Moldova|2015|2017|
|Bhutan|2014|2017|Morocco|1994|2002|
|Bolivia|2003|2005|Morocco|2014|2017|
|Bolivia|2017|2017|Mozambique|2000|2003|
|Bosnia & Herzegovina|1999|1999|<br>Mozambique|2016|2017|
|Bosnia & Herzegovina|2011|2016|Myanmar|2001|2005|
|<br>Botswana|2010|2015|<br>Namibia|1999|1999|
|Brazil|2002|2005|Namibia|2004|2006|
|Brazil|2016|2017|Namibia|2016|2017|
|Brunei Darussalam|2012|2017|Nepal|2001|2006|

- 40 -
|Bulgaria|1999|2003|Nicaragua|2000|2005|
|---|---|---|---|---|---|
|<br>Bulgaria|2015|2017|<br>Niger|2000|2005|
|<br>Burkina Faso|2003|2005|<br>Niger|2016|2017|
|Burkina Faso|2016|2017|Nigeria|1991|1994|
|Burundi|2003|2008|Nigeria|2000|2004|
|Cabo Verde|1998|1998|Nigeria|2016|2017|
|Cabo Verde|2001|2005|Oman|1993|2003|
|Cabo Verde|2014|2017|Oman|2016|2017|
|Cambodia|2003|2006|Pakistan|2000|2003|
|Cambodia|2012|2013|Pakistan|2013|2017|
|Cameroon|1999|2005|Panama|1995|1996|
|Cameroon|2016|2017|Panama|2002|2006|
|Central African Rep.|2001|2005|Papua New Guinea|1998|2004|
|Central African Rep.|2015|2017|Papua New Guinea|2015|2017|
|Chad|2000|2003|Paraguay|1991|1992|
|Chad|2015|2017|Paraguay|2000|2004|
|Chile|1992|1994|Paraguay|2016|2017|
|Chile|2002|2003|Peru|2001|2006|
|Chile|2013|2017|Philippines|1994|1995|
|China|2003|2003|<br>Philippines|2002|2006|
|China|2010|2010|<br>Poland|1996|1997|
|China|2014|2017|Poland|2004|2006|
|Colombia|2001|2005|Poland|2010|2013|
|Colombia|2015|2017|Qatar|1995|2003|
|Comoros|1991|2000|Qatar|2012|2012|
|Congo, Dem. Rep.|2001|2007|Qatar|2016|2017|
|<br>Congo, Rep.|2001|2004|Romania|2001|2003|
|Congo, Rep.|2016|2017|Romania|2011|2017|
|Costa Rica|1999|2005|Russian Federation|2000|2002|
|Costa Rica|2014|2017|Russian Federation|2015|2017|
|Côte d'Ivoire|1998|2002|Rwanda|1996|1996|
|Côte d'Ivoire|2006|2008|Rwanda|2000|2005|
|Croatia|2011|2017|Rwanda|2016|2017|
|Djibouti|2003|2010|Samoa|1999|2002|
|Dominica|2002|2006|Samoa|2013|2017|
|Dominica|2014|2015|São Tomé & Príncipe|2002|2006|
|Dominican Republic|2004|2004|Saudi Arabia|1996|2004|
|Dominican Republic|2013|2017|Saudi Arabia|2017|2017|
|Ecuador|2002|2007|Senegal|2001|2005|
|Ecuador|2016|2017|Senegal|2014|2017|
|Egypt, Arab Rep.|2003|2006|Serbia|2001|2001|
|<br>Egypt, Arab Rep.|2014|2017|Serbia|2013|2017|
|<br>El Salvador|1992|1993|Seychelles|1999|2004|
|El Salvador|2003|2004|<br>Seychelles|2008|2008|
|El Salvador|2010|2017|<br>Sierra Leone|2002|2006|
|Equatorial Guinea|1991|1995|Sierra Leone|2017|2017|
|Equatorial Guinea|2016|2017|Solomon Islands|2004|2009|
|Eritrea|2002|2003|South Africa|2001|2003|
|Eritrea|2008|2008|South Africa|2013|2017|

- 41 -
|Ethiopia|1994|1996|Sri Lanka|1991|1991|
|---|---|---|---|---|---|
|<br>Ethiopia|2002|2005|Sri Lanka|2001|2004|
|Ethiopia|2016|2017|Sri Lanka|2016|2017|
|Fiji|1995|1997|St. Kitts & Nevis|2003|2012|
|Fiji|2007|2012|St. Lucia|2002|2006|
|Gabon|1991|1993|St. Lucia|2012|2017|
|Gabon|1999|2004|St. Vincent & the Grenadines|1991|1992|
|Gabon|2016|2017|St. Vincent & the Grenadines|2000|2001|
|Gambia, The|2002|2006|St. Vincent & the Grenadines|2005|2006|
|Gambia, The|2015|2017|St. Vincent & the Grenadines|2012|2017|
|Georgia|2001|2004|Sudan|1993|1995|
|Georgia|2010|2010|Sudan|2013|2013|
|Georgia|2016|2017|Sudan|2016|2017|
|Ghana|1995|1995|Suriname|1991|1993|
|Ghana|2000|2003|Suriname|2000|2005|
|Ghana|2014|2017|Suriname|2016|2017|
|Grenada|2003|2007|Eswatini|1999|2003|
|Grenada|2010|2014|Eswatini|2016|2017|
|Guatemala|2010|2017|Syrian Arab Republic|1991|1994|
|Guinea|2000|2006|<br>Syrian Arab Republic|1998|2004|
|Guinea|2011|2011|<br>Tajikistan|1999|2003|
|Guinea-Bissau|2001|2009|<br>Tajikistan|2017|2017|
|Guyana|1998|2006|Tanzania|2002|2005|
|Haiti|2001|2006|Tanzania|2015|2017|
|Haiti|2016|2017|Thailand|1999|2005|
|Honduras|1991|1993|Thailand|2013|2017|
|Honduras|2003|2005|Togo|2006|2009|
|Honduras|2014|2017|Togo|2016|2017|
|Hungary|1996|1996|<br>Tonga|2013|2016|
|Hungary|2009|2014|Trinidad & Tobago|1992|2002|
|India|1992|1994|Trinidad & Tobago|2016|2017|
|India|2002|2006|Tunisia|1994|1997|
|Indonesia|2001|2004|Tunisia|2000|2000|
|Indonesia|2017|2017|Tunisia|2004|2005|
|Iran, Islamic Rep.|1997|1998|Tunisia|2015|2017|
|Iran, Islamic Rep.|2003|2004|Turkey|2002|2005|
|Iran, Islamic Rep.|2016|2017|Turkmenistan|1998|2001|
|Iraq|2005|2007|Turkmenistan|2013|2017|
|Iraq|2017|2017|Tuvalu|2006|2006|
|Jamaica|2003|2005|Tuvalu|2016|2017|
|Jamaica|2010|2014|Uganda|2000|2005|
|Jordan|1991|1993|<br>Uganda|2015|2017|
|Jordan|2003|2004|<br>Ukraine|1999|2002|
|Jordan|2014|2017|Ukraine|2015|2017|
|Kazakhstan|2003|2004|United Arab Emirates|2009|2012|
|Kazakhstan|2015|2017|United Arab Emirates|2016|2017|
|Kenya|1999|1999|Uruguay|2003|2006|
|Kenya|2002|2004|Uzbekistan|2001|2005|
|Kenya|2015|2017|Vanuatu|1999|2004|

- 42 -
|Kiribati|1994|1997|Vanuatu|2016|2017|
|---|---|---|---|---|---|
|Kiribati|2016|2017|Venezuela, RB|2003|2004|
|Kosovo|2007|2008|Venezuela, RB|2012|2014|
|Kosovo|2016|2017|Vietnam|2010|2010|
|Kuwait|1992|1995|Vietnam|2013|2017|
|Kuwait|2017|2017|Yemen, Rep.|2000|2003|
|Kyrgyz Republic|2001|2005|Yemen, Rep.|2016|2017|
|Kyrgyz Republic|2016|2017|Zambia|2001|2004|
|Lao PDR|2002|2005|Zambia|2016|2017|
|Lao PDR|2015|2017|Zimbabwe|2009|2010|
|Lebanon|2004|2008|Zimbabwe|2017|2017|
|Lebanon|2017|2017||||

**Table 16: Fiscal adjustment in advanced countries using debt/revenue ratio**

|**Country**|**Begin**|**End**|**Country**|**Begin**|**End**|
|---|---|---|---|---|---|
|Australia|1994|1997|Japan|2004|2005|
|Australia|2012|2015|<br>Japan|2011|2016|
|Austria|2010|2013|Korea, Rep.|2005|2006|
|Belgium|1993|1998|Korea, Rep.|2016|2017|
|Belgium|2012|2013|Latvia|2010|2012|
|Canada|1994|1997|Latvia|2015|2016|
|Canada|2011|2015|Lithuania|2014|2016|
|Cyprus|2004|2005|Luxembourg|1996|1997|
|Cyprus|2013|2014|Luxembourg|2011|2013|
|Czech Republic|2010|2012|Malta|2004|2005|
|Denmark|1995|1999|Malta|2010|2011|
|Denmark|2013|2014|Netherlands|2010|2013|
|Estonia|2013|2014|New Zealand|1992|1995|
|Finland|1996|1998|New Zealand|2011|2016|
|Finland|2015|2016|Norway|1993|1994|
|France|1996|1999|Norway|2004|2006|
|France|2011|2013|Portugal|2011|2013|
|France|2015|2017|<br>Portugal|2015|2016|
|Germany|1996|1999|Slovak Republic|2012|2014|
|Germany|2011|2014|Slovak Republic|2016|2017|
|Greece|1994|1996|Slovenia|2014|2016|
|Greece|2011|2013|Spain|1996|1999|
|Iceland|1995|1997|Spain|2012|2014|
|Iceland|2009|2014|Sweden|1994|1998|
|Ireland|1991|1994|Sweden|2015|2016|
|Ireland|1996|1997|United Kingdom|1994|1998|
|Ireland|2011|2014|<br>United Kingdom|2010|2011|
|Israel|2003|2006|United Kingdom|2015|2017|
|Italy|1995|1997|United States|2010|2015|
|Italy|2011|2013||||

- 43 -
**Table 17: Fiscal adjustment in emerging countries using debt/revenue ratio**

|**Country**|**Begin**|**End**|**Country**|**Begin**|**End**|
|---|---|---|---|---|---|
|Albania|2015|2016|Iran, Islamic Rep.|2003|2004|
|Algeria|1995|1996|Jamaica|2012|2013|
|Algeria|1999|2000|Jordan|2014|2017|
|Antigua & Barbuda|2002|2004|Kenya|2003|2004|
|Argentina|2003|2004|Kuwait|1992|1995|
|Armenia|2010|2012|Kyrgyz Republic|2001|2002|
|Armenia|2016|2017|Macedonia, FYR|2002|2003|
|Azerbaijan|2000|2001|Macedonia, FYR|2015|2017|
|Azerbaijan|2016|2017|Madagascar|2002|2003|
|Bahamas, The|1994|1995|Malaysia|2010|2013|
|Bahamas, The|2014|2016|Mauritania|2016|2017|
|Bahrain|1999|2000|Mexico|2015|2017|
|Bahrain|2003|2004|Moldova|2015|2017|
|Bahrain|2016|2017|Morocco|1995|1997|
|Bangladesh|2006|2007|Morocco|2014|2017|
|Barbados|2016|2017|Mozambique|2002|2003|
|Belarus|2010|2012|Mozambique|2016|2017|
|Belarus|2016|2017|Namibia|2005|2006|
|Belize|2004|2007|Namibia|2016|2017|
|Benin|2016|2017|Nepal|2002|2003|
|Bolivia|2003|2005|Nicaragua|2002|2003|
|Botswana|2010|2013|<br>Niger|2016|2017|
|Brazil|2016|2017|Oman|1994|1997|
|Bulgaria|2015|2016|Oman|1999|2000|
|Cabo Verde|2001|2004|Pakistan|2000|2002|
|Cabo Verde|2014|2016|Pakistan|2013|2014|
|Cambodia|2003|2005|Panama|1995|1996|
|Cambodia|2012|2013|Panama|2005|2006|
|Chad|2000|2002|Paraguay|2003|2004|
|Chad|2015|2017|Peru|2001|2002|
|Comoros|1996|1997|Peru|2004|2006|
|Congo, Dem. Rep.|2001|2002|Philippines|2003|2006|
|Congo, Dem. Rep.|2004|2006|Poland|2004|2005|
|Congo, Rep.|2003|2004|Poland|2011|2013|
|Congo, Rep.|2016|2017|Romania|2011|2012|
|Costa Rica|2015|2016|Russian Federation|2016|2017|
|Côte d'Ivoire|2000|2001|Rwanda|2003|2004|
|Côte d'Ivoire|2007|2008|Saudi Arabia|1996|1997|
|Croatia|2012|2017|Saudi Arabia|1999|2000|
|Dominica|2002|2003|Saudi Arabia|2003|2004|
|Dominican Republic|2013|2015|Senegal|2014|2016|
|Egypt, Arab Rep.|2016|2017|Sierra Leone|2004|2006|
|El Salvador|2013|2017|South Africa|2013|2015|
|Equatorial Guinea|2016|2017|Sri Lanka|2001|2003|
|Eritrea|2002|2003|Sri Lanka|2016|2017|
|Ethiopia|2003|2004|St. Lucia|2013|2016|

- 44 -
|Gabon|1999|2000|St. Vincent & the Grenadines|2014|2016|
|---|---|---|---|---|---|
|Gambia, The|2002|2003|Sudan|1993|1994|
|Georgia|2001|2002|Thailand|2015|2016|
|Georgia|2016|2017|Togo|2007|2008|
|Ghana|2002|2003|Trinidad & Tobago|2000|2001|
|Ghana|2014|2015|Uganda|2003|2004|
|Guatemala|2011|2016|Uganda|2015|2017|
|Guinea|2004|2005|United Arab Emirates|2010|2012|
|Guinea-Bissau|2008|2009|United Arab Emirates|2016|2017|
|Honduras|1991|1992|Uruguay|2003|2004|
|Honduras|2004|2005|Uzbekistan|2003|2005|
|Honduras|2014|2017|Vanuatu|2001|2004|
|India|2004|2006|Vietnam|2014|2016|
|Indonesia|2001|2002|Zimbabwe|2009|2010|

- 45 -
Figure A1: Countries doing fiscal adjustment <!-- Start of picture text --> Number of countries doing fiscal adjustment<br>Advanced economies EMDEs<br>1990 2000 2010 2020 1990 2000 2010 2020<br>Year Year<br>Primary gap Debt/revenue Primary gap Debt/revenue<br>20 30<br>15<br>20<br>10<br>10<br>5<br>0 0<br><!-- End of picture text -->

- 46 -
# Appendix 3: Linear probability models:

## Table 18

|Dependent variable: Nee|d of fiscal ad|justment b|ased on Esc|olano et al|.(2014)||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure minus|0.038***|0.032***|0.039***|0.032***|0.041***|0.041***|0.010|0.026|
|structural as % GDP|(0.007)|(0.006)|(0.006)|(0.006)|(0.008)|(0.014)|(0.020)|(0.016)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-2.034***||-1.901***|-1.807***|-1.869***|-1.860***|-1.909***|
|||(0.422)||(0.419)|(0.410)|(0.423)|(0.411)|(0.422)|
|Inflation (t-1)||-0.046||-0.001|-0.013|-0.004|-0.008|-0.003|
|||(0.063)||(0.052)|(0.056)|(0.052)|(0.056)|(0.054)|
|U.S. Interest rate||-0.016||-0.022*|-0.024*|-0.023*|-0.025**|-0.022*|
|||(0.011)||(0.012)|(0.012)|(0.012)|(0.012)|(0.012)|
|**Political factors**|||||||||
|Gini|||0.007|0.006|0.005|0.007|0.006|0.006|
||||(0.006)|(0.006)|(0.006)|(0.007)|(0.006)|(0.006)|
|Rule of law|||0.001|0.021|0.017|0.020|-0.026|0.021|
||||(0.031)|(0.032)|(0.031)|(0.031)|(0.035)|(0.032)|
|Margin of Majority|||0.082|0.052|0.068|0.052|0.061|-0.030|
||||(0.128)|(0.129)|(0.128)|(0.130)|(0.129)|(0.152)|
|Election's year|||0.021|0.029*|0.031**|0.029*|0.030*|0.029*|
||||(0.015)|(0.015)|(0.015)|(0.015)|(0.015)|(0.015)|
|**Interactions**|||||||||
|EMEs * Deviation|||||-0.020*<br>(0.011)||||
|Gini * Deviation||||||-0.000<br>(0.000)|||
|Rule of law * Deviation|||||||0.005<br>(0.004)||
|Majority * Deviation||||||||0.011|
|||||||||(0.026)|
|Constant|-0.226***|-0.041|-0.581*|-0.379|-0.355|-0.446|-0.183|-0.327|
||(0.065)|(0.070)|(0.323)|(0.295)|(0.281)|(0.340)|(0.268)|(0.290)|
|Observations|1,467|1,451|1,318|1,304|1,304|1,304|1,304|1,304|
|R-squared|0.104|0.164|0.118|0.171|0.179|0.172|0.176|0.172|
|Number of ifscode|83|83|74|74|74|74|74|74|
|CountryFE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Robust standard errors cl|ustered by c|ountry in pa|rentheses||||||
|*** p<0.01, ** p<0.05, *|p<0.1||||||||

- 47 -
Table 19

|Dependent variable: Need|of fiscal ad|justment ba|sed on deb|t/revenue|||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure minus|0.012**|0.009*|0.013*|0.009|0.036***|0.030|-0.026|0.017|
|structural as % GDP|(0.005)|(0.005)|(0.007)|(0.007)|(0.010)|(0.027)|(0.019)|(0.019)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-1.504***||-1.999***|-1.750***|-1.967***|-1.910***|-1.992***|
|||(0.363)||(0.353)|(0.367)|(0.360)|(0.371)|(0.354)|
|Inflation (t-1)||0.026||0.285**|0.273**|0.273**|0.262**|0.288**|
|||(0.145)||(0.128)|(0.128)|(0.129)|(0.129)|(0.128)|
|U.S. Interest rate||-0.008||-0.016|-0.020|-0.017|-0.020|-0.016|
|||(0.012)||(0.013)|(0.013)|(0.013)|(0.013)|(0.013)|
|**Political factors**|||||||||
|Gini|||0.007|0.007|0.007|0.010|0.007|0.007|
||||(0.006)|(0.005)|(0.005)|(0.007)|(0.005)|(0.005)|
|Rule of law|||0.014|0.039|0.034|0.036|-0.033|0.039|
||||(0.044)|(0.050)|(0.051)|(0.050)|(0.061)|(0.050)|
|Margin of Majority|||-0.162|-0.143|-0.129|-0.149|-0.135|-0.067|
||||(0.153)|(0.157)|(0.154)|(0.156)|(0.158)|(0.248)|
|Election's year|||-0.010|-0.007|-0.004|-0.006|-0.005|-0.007|
||||(0.015)|(0.016)|(0.016)|(0.016)|(0.016)|(0.016)|
|**Interactions**|||||||||
|EMEs * Deviation|||||-0.044***<br>(0.013)||||
|Gini * Deviation||||||-0.001<br>(0.001)|||
|Rule of law * Deviation|||||||0.009*<br>(0.004)||
|Majority * Deviation||||||||-0.012<br>(0.027)|
|Constant|0.274***|0.384***|0.021|0.068|0.072|-0.039|0.328|0.019|
||(0.038)|(0.064)|(0.298)|(0.282)|(0.276)|(0.326)|(0.303)|(0.307)|
|Observations|2,799|2,738|1,949|1,918|1,918|1,918|1,918|1,918|
|R-squared|0.005|0.023|0.011|0.039|0.052|0.040|0.044|0.039|
|Number of ifscode|138|137|98|98|98|98|98|98|
|CountryFE<br>Robust standard errors cl<br>*** p<0.01, ** p<0.05, *|Yes<br>ustered by c<br>p<0.1|Yes<br>ountry in pa|Yes<br>rentheses|Yes|Yes|Yes|Yes|Yes|

- 48 -
_Table 20_

|Dependent variable: N|eed of fisc|al adjustm|ent based|on Escola|no et al.(|2014)|||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure, CE|0.058***|0.052***|0.061***|0.053***|0.051***|0.053***|0.051***|0.053***|
|(% of GDP)|(0.015)|(0.013)|(0.014)|(0.013)|(0.014)|(0.014)|(0.014)|(0.013)|
|Rigid expenditure, SS|0.031***|0.029***|0.034***|0.029***|0.039***|0.029**|0.015|0.030**|
|(% of GDP)|(0.008)|(0.007)|(0.007)|(0.007)|(0.008)|(0.014)|(0.019)|(0.012)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-2.093***||-1.963***|-1.850***|-1.962***|-1.934***|-1.960***|
|||(0.424)||(0.427)|(0.408)|(0.429)|(0.415)|(0.436)|
|Inflation (t-1)||-0.016||0.021|-0.000|0.021|0.016|0.021|
|||(0.054)||(0.043)|(0.048)|(0.043)|(0.046)|(0.044)|
|U.S. Interest rate||0.002||-0.002|-0.000|-0.002|-0.002|-0.002|
|||(0.010)||(0.012)|(0.012)|(0.012)|(0.012)|(0.012)|
|**Political factors**|||||||||
|Gini|||0.007|0.005|0.004|0.005|0.005|0.005|
||||(0.006)|(0.006)|(0.006)|(0.007)|(0.006)|(0.006)|
|Rule of law|||0.032|0.023|0.014|0.023|-0.029|0.022|
||||(0.027)|(0.031)|(0.029)|(0.031)|(0.046)|(0.032)|
|Margin of Majority|||0.050|0.041|0.057|0.041|0.057|0.060|
||||(0.123)|(0.125)|(0.124)|(0.126)|(0.129)|(0.165)|
|Election's year|||0.020|0.028*|0.030**|0.028*|0.029**|0.028*|
||||(0.015)|(0.015)|(0.014)|(0.015)|(0.014)|(0.015)|
|**Interactions**|||||||||
|EMEs * Rigidity|||||-0.020<br>(0.013)||||
|Gini * Rigidity||||||-0.000<br>(0.000)|||
|Rule of law * Rigidity|||||||0.003<br>(0.003)||
|Majority * Rigidity||||||||-0.002<br>(0.014)|
|Constant|-0.840***|-0.685***|-1.345***|-1.000***|-0.980***|-1.004***|-0.806**|-1.011***|
||(0.199)|(0.175)|(0.308)|(0.283)|(0.280)|(0.337)|(0.324)|(0.292)|
|Observations|1,521|1,500|1,360|1,342|1,342|1,342|1,342|1,342|
|R-squared|0.115|0.172|0.134|0.179|0.184|0.179|0.181|0.179|
|Number of ifscode|84|84|75|75|75|75|75|75|
|CountryFE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Robust standard error|s clustere|d by count|ry in pare|ntheses|||||
|*** p<0.01, ** p<0.05|,* p<0.1||||||||

- 49 -
_Table 21_

|Dependent variable: Need of fiscal|adjustmen|t based on|Escolano|et al.(20|14)||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid CE minus structural as % GDP|0.064***<br>(0.015)|0.054***<br>(0.012)|0.068***<br>(0.015)|0.055***<br>(0.014)|0.054***<br>(0.014)|0.055***<br>(0.014)|0.056***<br>(0.014)|0.055***<br>(0.014)|
|Rigid SS minus structural as % GDP|0.031***|0.027***|0.031***|0.027***|0.036***|0.028**|0.010|0.026***|
||(0.007)|(0.006)|(0.007)|(0.006)|(0.008)|(0.012)|(0.016)|(0.010)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-1.976***||-1.848***|-1.721***|-1.841**|*-1.835**|*-1.850***|
|||(0.427)||(0.425)|(0.407)|(0.427)|(0.422)|(0.434)|
|Inflation (t-1)||-0.054||-0.012|-0.036|-0.013|-0.018|-0.012|
|||(0.053)||(0.043)|(0.049)|(0.043)|(0.042)|(0.043)|
|U.S. Interest rate||-0.016||-0.021*|-0.025*|-0.022|-0.012|-0.021|
|||(0.011)||(0.012)|(0.013)|(0.013)|(0.013)|(0.013)|
|**Political factors**|||||||||
|Gini|||0.006|0.005|0.004|0.005|0.005|0.005|
||||(0.006)|(0.006)|(0.006)|(0.007)|(0.006)|(0.006)|
|Rule of law|||0.001|0.020|0.011|0.020|-0.045|0.020|
||||(0.031)|(0.032)|(0.030)|(0.032)|(0.039)|(0.033)|
|Margin of Majority|||0.085|0.054|0.073|0.055|0.076|0.043|
||||(0.124)|(0.126)|(0.126)|(0.127)|(0.127)|(0.162)|
|Election's year|||0.021|0.028*|0.030**|0.028*|0.029*|0.028*|
||||(0.015)|(0.015)|(0.015)|(0.015)|(0.015)|(0.015)|
|**Interactions**|||||||||
|EMEs * Rigidity|||||-0.020||||
||||||(0.013)||||
|Gini * Rigidity||||||-0.000|||
|||||||(0.000)|||
|Rule of law * Rigidity|||||||0.004<br>(0.003)||
|Majority * Rigidity||||||||0.001|
|||||||||(0.012)|
|Constant|-0.255***|-0.071|-0.576*|-0.375|-0.248|-0.377|-0.324|-0.374|
||(0.069)|(0.071)|(0.327)|(0.296)|(0.275)|(0.303)|(0.288)|(0.296)|
|Observations|1,467|1,451|1,318|1,304|1,304|1,304|1,304|1,304|
|R-squared|0.111|0.169|0.127|0.176|0.181|0.176|0.180|0.176|
|Number of ifscode|83|83|74|74|74|74|74|74|
|CountryFE<br>Robust standard errors clustered b<br>*** p<0.01, ** p<0.05, * p<0.1|Yes<br>y country i|Yes<br>n parenth|Yes<br>eses|Yes|Yes|Yes|Yes|Yes|

- 50 -
_Table 22_

|Dependent variable: F|iscal adju|stment wh|en neede|d based o|n Escolano|et al.(20|14)||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure, CE|-0.020|-0.026|-0.028|-0.066|-0.048|-0.041|-0.060|-0.062|
|(% of GDP)|(0.063)|(0.055)|(0.062)|(0.060)|(0.064)|(0.061)|(0.060)|(0.055)|
|Rigid expenditure, SS|-0.025**|-0.038***|-0.026**|-0.034***|-0.022***|0.106*|-0.121***|-0.079**|
|(% of GDP)|(0.012)|(0.011)|(0.011)|(0.011)|(0.007)|(0.057)|(0.033)|(0.032)|
|Economic factors|||||||||
|GDP growth (t-1)||-0.296||0.311|0.465|0.383|0.245|0.341|
|||(1.387)||(1.441)|(1.444)|(1.450)|(1.432)|(1.436)|
|Inflation (t-1)||2.625***||2.731***|3.609***|3.370***|3.701***|2.587**|
|||(0.774)||(0.996)|(1.048)|(0.999)|(0.997)|(1.074)|
|U.S. Interest rate||-0.129**||-0.167**|-0.175***|-0.197***|-0.201***|-0.180***|
|||(0.051)||(0.063)|(0.065)|(0.055)|(0.069)|(0.050)|
|Political factors|||||||||
|Gini|||0.008|0.007|0.009|0.054**|0.009|0.001|
||||(0.009)|(0.011)|(0.011)|(0.022)|(0.012)|(0.010)|
|Rule of law|||-0.224***|0.092|0.129|0.122|-0.061|0.096|
||||(0.062)|(0.124)|(0.125)|(0.121)|(0.112)|(0.126)|
|Margin of Majority|||0.437|0.154|0.118|0.272|0.150|-0.944*|
||||(0.383)|(0.357)|(0.361)|(0.339)|(0.351)|(0.550)|
|Election's year|||-0.111|-0.087|-0.073|-0.068|-0.070|-0.074|
||||(0.079)|(0.075)|(0.070)|(0.071)|(0.075)|(0.080)|
|Interactions|||||||||
|EMEs * Rigidity|||||-0.058*<br>(0.033)||||
|Gini * Rigidity||||||-0.004**<br>(0.002)|||
|Rule of law * Rigidity|||||||0.018***<br>(0.006)||
|Majority * Rigidity||||||||0.088<br>(0.059)|
|Constant|0.807|1.384**|1.247|1.180|0.972|-0.996|1.882**|1.948**|
||(0.600)|(0.555)|(0.815)|(0.981)|(0.973)|(1.428)|(0.877)|(0.905)|
|Observations|185|183|165|163|163|163|163|163|
|R-squared|0.021|0.139|0.090|0.185|0.200|0.224|0.214|0.206|
|Number of ifscode|60|60|53|53|53|53|53|53|
|CountryFE<br>Robust standard error<br>*** p<0.01, ** p<0.05|Yes<br>s clustere<br>, * p<0.1|Yes<br>d by coun|Yes<br>try in pare|Yes<br>ntheses|Yes|Yes|Yes|Yes|

- 51 -
_Table 23_

|Dependent variable: Fiscal adjustm|ent when|needed b|ased on Es|colano et|al.(2014)||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid CE minus structural as % GDP|-0.039|-0.035|-0.030|-0.055|-0.037|-0.035|-0.044|-0.051|
||(0.068)|(0.052)|(0.064)|(0.063)|(0.066)|(0.056)|(0.065)|(0.060)|
|Rigid SS minus structural as % GDP-|0.031***|-0.030***|-0.033***|-0.032***|-0.020***|0.107*|-0.110**|-0.077**|
||(0.012)|(0.009)|(0.012)|(0.011)|(0.006)|(0.056)|(0.047)|(0.029)|
|**Economic factors**|||||||||
|GDP growth (t-1)||0.053||0.143|0.424|0.332|0.195|0.129|
|||(1.340)||(1.527)|(1.573)|(1.544)|(1.536)|(1.520)|
|Inflation (t-1)||2.747***||3.224***|3.758***|3.453***|3.731***|3.265***|
|||(0.808)||(1.166)|(1.108)|(1.120)|(1.069)|(1.200)|
|U.S. Interest rate||-0.136**||-0.151**|-0.162**|-0.240***|-0.144**|-0.147**|
|||(0.051)||(0.066)|(0.067)|(0.059)|(0.068)|(0.058)|
|**Political factors**|||||||||
|Gini|||0.006|0.004|0.008|0.058**|0.003|-0.003|
||||(0.010)|(0.013)|(0.013)|(0.027)|(0.014)|(0.013)|
|Rule of law|||-0.208***|0.115|0.131|0.120|-0.041|0.132|
||||(0.068)|(0.141)|(0.136)|(0.119)|(0.168)|(0.147)|
|Margin of Majority|||0.386|0.143|0.115|0.313|0.120|-0.982*|
||||(0.385)|(0.373)|(0.376)|(0.355)|(0.381)|(0.515)|
|Election's year|||-0.111|-0.081|-0.071|-0.069|-0.069|-0.065|
||||(0.079)|(0.077)|(0.071)|(0.072)|(0.075)|(0.082)|
|**Interactions**|||||||||
|EMEs * Rigidity|||||-0.061<br>(0.037)||||
|Gini * Rigidity||||||-0.004**<br>(0.002)|||
|Rule of law * Rigidity|||||||0.016*<br>(0.008)||
|Majority * Rigidity||||||||0.089<br>(0.057)|
|Constant|0.599**|0.907***|0.956|0.354|0.437|-0.483|0.486|0.779|
||(0.231)|(0.253)|(0.718)|(0.940)|(0.905)|(0.982)|(0.937)|(0.897)|
|Observations|182|180|164|162|162|162|162|162|
|R-squared|0.035|0.157|0.100|0.181|0.196|0.225|0.201|0.202|
|Number of ifscode|60|60|53|53|53|53|53|53|
|CountryFE<br>Robust standard errors clustered by<br>*** p<0.01, ** p<0.05, * p<0.1|Yes<br>country|Yes<br>in parenth|Yes<br>eses|Yes|Yes|Yes|Yes|Yes|

- 52 -
# Appendix 4: Logit models:

## Table 24

|Dependent variable: N|eed of fisc|al adjustme|nt based o|n Escolano|et al.(2014|)|||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure|0.003**|-0.000|0.007***|0.004***|0.004**|-0.002|0.005*|0.008**|
|**Economic factors**<br>(% of GDP)|(0.001)|(0.001)|(0.002)|(0.001)|(0.002)|(0.004)|(0.003)|(0.004)|
|GDP growth (t-1)||-1.953***||-1.329***|-1.294***|-1.318***|-1.329***|-1.286***|
|||(0.346)||(0.288)|(0.286)|(0.280)|(0.288)|(0.285)|
|Inflation (t-1)||-0.326||-0.384**|-0.474***|-0.425***|-0.411**|-0.364**|
|||(0.248)||(0.158)|(0.144)|(0.160)|(0.163)|(0.154)|
|U.S. Interest rate||-0.021**||-0.013*|-0.011|-0.012|-0.013*|-0.013*|
|||(0.010)||(0.007)|(0.007)|(0.007)|(0.007)|(0.007)|
|**Political factors**|||||||||
|Gini|||0.003**<br>(0.002)|0.003**<br>(0.001)|0.002**<br>(0.001)|-0.001<br>(0.003)|0.003**<br>(0.001)|0.003***<br>(0.001)|
|Rule of law|||-0.026*** <br>(0.009)|-0.019**<br>(0.008)|-0.011<br>(0.008)|-0.019**<br>(0.008)|-0.010<br>(0.016)|-0.019**<br>(0.008)|
|Margin of Majority<br>Election's year<br>**Interactions**|||0.189**<br>(0.081)<br>0.037*** <br>(0.014)|0.162*** <br>(0.055)<br> 0.037*** <br>(0.012)|0.149*** <br>(0.050)<br> 0.035*** <br>(0.012)|0.150*** <br>(0.056)<br> 0.036*** <br>(0.012)|0.162*** <br>(0.056)<br> 0.036*** <br>(0.011)|0.337***<br>(0.130)<br> 0.036***<br>(0.012)|
|EMEs|||||0.040<br>(0.075)||||
|EMEs * Rigidity|||||0.001<br>(0.002)||||
|Gini * Rigidity||||||0.000<br>(0.000)|||
|Rule of law * Rigidity|||||||-0.000<br>(0.001)||
|Majority * Rigidity||||||||-0.008<br>(0.005)|
|Observations|1,521|1,500|1,360|1,342|1,342|1,342|1,342|1,342|
|Country FE|No|No|No|No|No|No|No|No|
|r2_p|0.0121|0.121|0.0738|0.182|0.194|0.187|0.183|0.187|
|Robust standard errors<br>*** p<0.01, ** p<0.05,|clustered<br>* p<0.1|by country|in parenth|eses|||||

- 53 -
Table 25

|Dependent variable: N|eed of fisc|al adjustme|nt based o|n debt/rev|enue||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure|0.003***|0.002***|0.003***|0.001|0.006|0.005|-0.005|0.008|
|(% of GDP)|(0.001)|(0.001)|(0.001)|(0.001)|(0.004)|(0.006)|(0.004)|(0.005)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-1.568***||-1.939***|-1.862***|-1.923***|-1.890***|-1.918***|
|||(0.352)||(0.361)|(0.370)|(0.363)|(0.369)|(0.359)|
|Inflation (t-1)||-0.065||0.064|0.088|0.066|0.078|0.060|
|||(0.107)||(0.110)|(0.108)|(0.109)|(0.106)|(0.108)|
|U.S. Interest rate||-0.006||-0.005|-0.007|-0.006|-0.007|-0.005|
|||(0.010)||(0.011)|(0.012)|(0.012)|(0.012)|(0.011)|
|**Political factors**|||||||||
|Gini|||0.002|0.002|0.002|0.004|0.002|0.002|
||||(0.002)|(0.002)|(0.001)|(0.003)|(0.001)|(0.001)|
|Rule of law|||0.008|0.016|0.018|0.015|-0.018|0.014|
||||(0.010)|(0.011)|(0.013)|(0.011)|(0.024)|(0.011)|
|Margin of Majority|||-0.046|-0.039|-0.034|-0.033|-0.029|0.154|
||||(0.081)|(0.084)|(0.089)|(0.085)|(0.087)|(0.183)|
|Election's year|||-0.011|-0.017|-0.014|-0.017|-0.015|-0.018|
||||(0.015)|(0.015)|(0.015)|(0.015)|(0.015)|(0.015)|
|**Interactions**|||||||||
|EMEs|||||0.189<br>(0.129)||||
|EMEs * Rigidity|||||-0.007*<br>(0.004)||||
|Gini * Rigidity||||||-0.000<br>(0.000)|||
|Rule of law * Rigidity|||||||0.001*<br>(0.001)||
|Majority * Rigidity||||||||-0.011<br>(0.008)|
|Observations|3,046|2,911|2,066|2,007|2,007|2,007|2,007|2,007|
|Country FE|No|No|No|No|No|No|No|No|
|r2_p|0.00427|0.0180|0.00586|0.0219|0.0248|0.0221|0.0232|0.0229|
|Robust standard error<br>***p<0.01,**p<0.05|s clustered<br>,*p<0.1|by country|in parenth|eses|||||

- 54 -
Table 26

|Dependent variable: Nee|d of fiscal a|djustment|based on E|scolano et|al.(2014)||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure minus|0.010***|0.004|0.017***|0.010***|0.014***|0.003|0.010**|0.021***|
|structural as % GDP|(0.003)|(0.003)|(0.003)|(0.002)|(0.003)|(0.007)|(0.005)|(0.007)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-1.701***||-1.117***|-1.078***|-1.144***|-1.117***|-1.058***|
|||(0.381)||(0.272)|(0.257)|(0.272)|(0.272)|(0.274)|
|Inflation (t-1)||-0.296||-0.433***|-0.465***|-0.456***|-0.433**|-0.399**|
|||(0.220)||(0.165)|(0.139)|(0.169)|(0.173)|(0.159)|
|U.S. Interest rate||-0.021**||-0.011|-0.010|-0.010|-0.011|-0.010|
|||(0.010)||(0.007)|(0.007)|(0.007)|(0.007)|(0.007)|
|**Political factors**|||||||||
|Gini|||0.004**|0.003***|0.002**|0.001|0.003***|0.003***|
||||(0.001)|(0.001)|(0.001)|(0.002)|(0.001)|(0.001)|
|Rule of law|||-0.024***<br>(0.009)|-0.020***<br>(0.007)|-0.008<br>(0.008)|-0.019***<br>(0.007)|-0.020<br>(0.013)|-0.019***<br>(0.007)|
|Margin of Majority|||0.192**<br>(0.084)|0.163*** <br>(0.055)|0.136*** <br>(0.045)|0.158*** <br>(0.055)|0.163*** <br>(0.055)|0.310***<br>(0.093)|
|Election's year|||0.034**<br>(0.014)|0.035*** <br>(0.012)|0.034*** <br>(0.012)|0.034*** <br>(0.012)|0.035*** <br>(0.012)|0.035***<br>(0.012)|
|**Interactions**|||||||||
|EMEs|||||0.112*<br>(0.063)||||
|EMEs * Deviation|||||-0.004<br>(0.004)||||
|Gini * Deviation||||||0.000<br>(0.000)|||
|Rule of law * Deviation|||||||-0.000<br>(0.001)||
|Majority * Deviation||||||||-0.017<br>(0.011)|
|Observations|1,467|1,451|1,318|1,304|1,304|1,304|1,304|1,304|
|Country FE|No|No|No|No|No|No|No|No|
|r2_p<br>Robust standard errors cl<br>*** p<0.01, ** p<0.05, *|0.0374<br>ustered by<br>p<0.1|0.125<br>country in|0.114<br>parenthese|0.211<br>s|0.227|0.213|0.211|0.216|

- 55 -
Table 27

|Dependent variable: Nee|d of fiscal|adjustment|based on de|bt/revenu|e||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure minus|0.006***|0.003|0.006*|0.001|0.014*|0.019|-0.018*|0.010|
|structural as % GDP|(0.002)|(0.002)|(0.004)|(0.004)|(0.008)|(0.015)|(0.010)|(0.013)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-1.670***||-2.131***|-1.948***|-2.084***|-2.042***|-2.120***|
|||(0.382)||(0.376)|(0.388)|(0.383)|(0.390)|(0.376)|
|Inflation (t-1)||-0.066||0.099|0.127|0.096|0.112|0.100|
|||(0.108)||(0.109)|(0.107)|(0.109)|(0.105)|(0.108)|
|U.S. Interest rate||-0.009||-0.011|-0.015|-0.013|-0.015|-0.011|
|||(0.011)||(0.012)|(0.012)|(0.013)|(0.013)|(0.012)|
|**Political factors**|||||||||
|Gini|||0.002|0.002|0.002|0.005*|0.002|0.002|
||||(0.001)|(0.001)|(0.001)|(0.003)|(0.001)|(0.001)|
|Rule of law|||0.006|0.017|0.018|0.015|-0.022|0.016|
||||(0.010)|(0.012)|(0.014)|(0.012)|(0.022)|(0.012)|
|Margin of Majority|||-0.089|-0.075|-0.067|-0.061|-0.064|0.022|
||||(0.080)|(0.084)|(0.091)|(0.084)|(0.087)|(0.170)|
|Election's year|||-0.011|-0.010|-0.006|-0.010|-0.007|-0.011|
||||(0.015)|(0.015)|(0.016)|(0.015)|(0.016)|(0.015)|
|**Interactions**|||||||||
|EMEs|||||0.200*<br>(0.106)||||
|EMEs * Deviation|||||-0.022**<br>(0.009)||||
|Gini * Deviation||||||-0.000<br>(0.000)|||
|Rule of law * Deviation|||||||0.005**<br>(0.002)||
|Majority * Deviation||||||||-0.015<br>(0.019)|
|Observations|2,799|2,738|1,949|1,918|1,918|1,918|1,918|1,918|
|Country FE|No|No|No|No|No|No|No|No|
|r2_p|0.00308|0.0185|0.00510|0.0252|0.0313|0.0264|0.0281|0.0256|
|Robust standard errors c<br>*** p<0.01, ** p<0.05, *|lustered by<br>p<0.1|country in p|arentheses||||||

- 56 -
Table 28

|Dependent variable: Fi|scal adjust|ment whe|n needed b|ased on Esc|olano et al|.(2014)|||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure|0.005*|0.005*|0.006|0.003|0.011|0.047***|-0.034*|0.002|
|(% of GDP)|(0.003)|(0.003)|(0.005)|(0.006)|(0.009)|(0.018)|(0.017)|(0.024)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-0.454||-0.966|-0.575|-1.118|-1.086|-0.968|
|||(1.115)||(1.359)|(1.278)|(1.294)|(1.261)|(1.356)|
|Inflation (t-1)||-0.131||0.751|1.583|0.953|1.678*|0.744|
|||(0.654)||(0.890)|(0.973)|(0.837)|(0.938)|(0.896)|
|U.S. Interest rate||-0.034||-0.051|-0.070**|-0.074**|-0.088**|-0.051|
|||(0.028)||(0.036)|(0.034)|(0.032)|(0.040)|(0.036)|
|**Political factors**|||||||||
|Gini|||0.008**|0.008**|0.009***|0.040***|0.008**|0.008*|
||||(0.004)|(0.004)|(0.003)|(0.011)|(0.004)|(0.004)|
|Rule of law|||0.063|0.113***|0.088*|0.115***|-0.147|0.113***|
||||(0.042)|(0.041)|(0.051)|(0.036)|(0.136)|(0.043)|
|Margin of Majority|||0.061|0.075|0.157|0.136|0.075|0.033|
||||(0.246)|(0.348)|(0.348)|(0.335)|(0.324)|(1.040)|
|Election's year|||-0.094*|-0.102*|-0.085|-0.089*|-0.081|-0.102*|
||||(0.052)|(0.055)|(0.059)|(0.053)|(0.059)|(0.055)|
|**Interactions**|||||||||
|EMEs|||||0.408<br>(0.335)||||
|EMEs * Rigidity|||||-0.024<br>(0.015)||||
|Gini * Rigidity||||||-0.001***<br>(0.000)|||
|Rule of law * Rigidity|||||||0.009**<br>(0.004)||
|Majority * Rigidity||||||||0.002<br>(0.042)|
|Observations|185|183|165|163|163|163|163|163|
|Country FE|No|No|No|No|No|No|No|No|
|r2_p<br>Robust standard error<br>*** p<0.01, ** p<0.05|0.0183<br>s clustered<br>, * p<0.1|0.0338<br>by country|0.0718<br>in parenth|0.110<br>eses|0.156|0.146|0.149|0.110|

- 57 -
Table 29

|Dependent variable: Fi|scal adjustm|ent when|needed bas|ed on debt|/revenue||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure|0.006***|0.006***|0.006***|0.005***|0.007**|0.010|-0.006|0.008|
|(% of GDP)|(0.001)|(0.001)|(0.002)|(0.002)|(0.003)|(0.008)|(0.006)|(0.007)|
|**Economic factors**|||||||||
|GDP growth (t-1)||0.017||-0.210|-0.190|-0.201|-0.215|-0.203|
|||(0.266)||(0.480)|(0.481)|(0.479)|(0.480)|(0.480)|
|Inflation (t-1)||-0.170||-0.405|-0.332|-0.402|-0.357|-0.404|
|||(0.239)||(0.273)|(0.259)|(0.272)|(0.257)|(0.271)|
|U.S. Interest rate||-0.017*||-0.028**|-0.030**|-0.030**|-0.034**|-0.028**|
|||(0.010)||(0.013)|(0.013)|(0.013)|(0.013)|(0.012)|
|**Political factors**|||||||||
|Gini|||0.002|0.002|0.002|0.005|0.002|0.002|
||||(0.002)|(0.002)|(0.002)|(0.005)|(0.002)|(0.002)|
|Rule of law|||0.023|0.027|0.020|0.026|-0.033|0.027|
||||(0.019)|(0.020)|(0.022)|(0.021)|(0.037)|(0.020)|
|Margin of Majority|||-0.191|-0.189|-0.183|-0.184|-0.177|-0.119|
||||(0.130)|(0.126)|(0.125)|(0.123)|(0.122)|(0.245)|
|Election's year|||-0.037|-0.042|-0.040|-0.042|-0.039|-0.042|
||||(0.029)|(0.029)|(0.030)|(0.029)|(0.030)|(0.030)|
|**Interactions**|||||||||
|EMEs|||||0.067<br>(0.142)||||
|EMEs * Rigidity|||||-0.005<br>(0.005)||||
|Gini * Rigidity||||||-0.000<br>(0.000)|||
|Rule of law * Rigidity|||||||0.002*<br>(0.001)||
|Majority * Rigidity||||||||-0.004<br>(0.010)|
|Observations|1,121|1,081|771|755|755|755|755|755|
|Country FE|No|No|No|No|No|No|No|No|
|r2_p<br>Robust standard error<br>*** p<0.01, ** p<0.05|0.0296<br>s clustered<br>, * p<0.1|0.0353<br>by country i|0.0533<br>n parenthe|0.0676<br>ses|0.0705|0.0681|0.0726|0.0678|

- 58 -
Table 30

|Dependent variable: Fisca|l adjustme|nt when ne|eded based|on Escolan|o et al.(2|014)|||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure minus|0.006|0.006|-0.004|-0.009|-0.002|0.069**|-0.063*|-0.001|
|structural as % GDP|(0.006)|(0.006)|(0.010)|(0.010)|(0.014)|(0.030)|(0.034)|(0.055)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-0.630||-1.331|-0.747|-1.437|-1.456|-1.335|
|||(1.036)||(1.348)|(1.248)|(1.256)|(1.334)|(1.345)|
|Inflation (t-1)||0.155||1.345|1.755|1.320|1.661|1.380|
|||(0.752)||(1.057)|(1.103)|(1.151)|(1.156)|(1.054)|
|U.S. Interest rate||-0.035||-0.051|-0.062*|-0.068**|-0.070*|-0.051|
|||(0.030)||(0.038)|(0.036)|(0.033)|(0.039)|(0.037)|
|**Political factors**|||||||||
|Gini|||0.005|0.006|0.007**|0.027***|0.005|0.006|
||||(0.004)|(0.004)|(0.003)|(0.007)|(0.004)|(0.004)|
|Rule of law|||0.096**|0.145***|0.094*|0.149***|0.022|0.147***|
||||(0.048)|(0.039)|(0.055)|(0.037)|(0.106)|(0.040)|
|Margin of Majority|||-0.067|-0.023|0.116|0.045|-0.054|0.122|
||||(0.225)|(0.327)|(0.359)|(0.321)|(0.318)|(0.847)|
|Election's year|||-0.099*|-0.112**|-0.095|-0.094*|-0.101*|-0.112**|
||||(0.054)|(0.054)|(0.059)|(0.052)|(0.055)|(0.054)|
|**Interactions**|||||||||
|EMEs|||||0.090<br>(0.275)||||
|EMEs * Deviation|||||-0.036<br>(0.023)||||
|Gini * Deviation||||||-0.002***<br>(0.001)|||
|Rule of law * Deviation|||||||0.012<br>(0.008)||
|Majority * Deviation||||||||-0.015<br>(0.096)|
|Observations|182|180|164|162|162|162|162|162|
|Country FE|No|No|No|No|No|No|No|No|
|r2_p|0.00706|0.0236|0.0630|0.115|0.169|0.155|0.138|0.116|
|Robust standard errors cl<br>*** p<0.01, ** p<0.05, *|ustered by<br>p<0.1|country in|parenthese|s|||||

- 59 -
Table 31

|Dependent variable: Fisca|l adjustment|when need|ed based o|n debt/rev|enue||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure minus|0.011***|0.010***|0.007|0.004|0.004|0.005|-0.014|0.010|
|structural as % GDP|(0.003)|(0.003)|(0.004)|(0.005)|(0.008)|(0.020)|(0.014)|(0.018)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-0.070||-0.370|-0.324|-0.371|-0.387|-0.360|
|||(0.287)||(0.509)|(0.512)|(0.509)|(0.511)|(0.509)|
|Inflation (t-1)||-0.188||-0.376|-0.318|-0.377|-0.358|-0.372|
|||(0.238)||(0.257)|(0.245)|(0.258)|(0.250)|(0.258)|
|U.S. Interest rate||-0.019*||-0.033**|-0.034**|-0.033**|-0.037***|-0.033***|
|||(0.011)||(0.013)|(0.014)|(0.013)|(0.013)|(0.013)|
|**Political factors**|||||||||
|Gini|||0.001|0.001|0.002|0.002|0.002|0.001|
||||(0.002)|(0.002)|(0.002)|(0.005)|(0.002)|(0.002)|
|Rule of law|||0.041**|0.045**|0.031|0.045**|0.013|0.045**|
||||(0.019)|(0.021)|(0.024)|(0.021)|(0.035)|(0.021)|
|Margin of Majority|||-0.259*|-0.260**|-0.254*|-0.260**|-0.257**|-0.190|
||||(0.134)|(0.129)|(0.132)|(0.128)|(0.127)|(0.243)|
|Election's year|||-0.040|-0.047|-0.047|-0.047|-0.046|-0.048|
||||(0.030)|(0.030)|(0.031)|(0.030)|(0.031)|(0.031)|
|**Interactions**|||||||||
|EMEs|||||-0.024<br>(0.145)||||
|EMEs * Deviation|||||-0.006<br>(0.011)||||
|Gini * Deviation||||||-0.000<br>(0.001)|||
|Rule of law * Deviation|||||||0.004<br>(0.003)||
|Majority * Deviation||||||||-0.010<br>(0.028)|
|Observations|1,015|1,003|713|709|709|709|709|709|
|Country FE|No|No|No|No|No|No|No|No|
|r2_p|0.0166|0.0246|0.0394|0.0581|0.0614|0.0581|0.0606|0.0583|
|Robust standard errors cl<br>***p<0.01,**p<0.05,*p|ustered by co<br><0.1|untry in pa|rentheses||||||

- 60 -
# Appendix 5: Conditional logit models:

## Table 32

|Dependent variable: N|eed of fis|cal adjustme|nt based|on Escolano|et al.(201|4)|||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure|0.361***|0.400***|0.386***|0.398***|0.589***|0.672***|0.125|0.336***|
|(% of GDP)|(0.036)|(0.044)|(0.040)|(0.046)|(0.093)|(0.139)|(0.091)|(0.076)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-26.752***<br>(3.563)||-26.493***<br>(3.836)|-24.799***<br>(3.859)|-26.180***<br>(3.923)|-25.308***<br>(3.824)|-26.841***<br>(3.850)|
|Inflation (t-1)||-12.167***||-11.215***|-9.861***|-11.526***|-9.756***|-10.992***|
|||(3.716)||(3.829)|(3.658)|(3.843)|(3.513)|(3.810)|
|U.S. Interest rate||-0.064||-0.076|-0.159|-0.153|-0.155|-0.090|
|||(0.087)||(0.101)|(0.110)|(0.109)|(0.108)|(0.101)|
|**Political factors**|||||||||
|Gini|||0.098***|0.077**|0.068*|0.238***|0.072*|0.073*|
||||(0.035)|(0.038)|(0.037)|(0.085)|(0.038)|(0.038)|
|Rule of law|||0.326|0.169|0.095|0.168|-1.825***|0.195|
||||(0.269)|(0.339)|(0.341)|(0.343)|(0.697)|(0.340)|
|Margin of Majority|||1.539|1.919*|1.914*|2.125*|1.895*|-0.810|
||||(1.076)|(1.155)|(1.148)|(1.174)|(1.135)|(2.936)|
|Election's year|||0.239|0.441*|0.452*|0.427*|0.462*|0.441*|
||||(0.214)|(0.237)|(0.237)|(0.236)|(0.237)|(0.236)|
|**Interactions**|||||||||
|EMEs * Rigidity|||||-0.304***<br>(0.112)||||
|Gini * Rigidity||||||-0.007**<br>(0.003)|||
|Rule of law * Rigidity|||||||0.073***<br>(0.022)||
|Majority * Rigidity||||||||0.109<br>(0.108)|
|Observations|1,080|1,065|960|948|948|948|948|948|
|Number of ifscode|60|60|53|53|53|53|53|53|
|Country FE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|r2_p<br>Standard errors in par<br>*** p<0.01, ** p<0.05|0.203<br>entheses<br>, * p<0.1|0.344|0.233|0.352|0.366|0.360|0.370|0.354|

- 61 -
Table 33

|Dependent variable: N|eed of fisc|al adjustm|ent based o|n debt/rev|enue||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure|0.104***|0.107***|0.117***|0.107***|0.269***|0.086*|0.012|0.139***|
|(% of GDP)|(0.012)|(0.014)|(0.016)|(0.017)|(0.036)|(0.044)|(0.034)|(0.029)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-6.476***||-7.620***|-6.558***|-7.644***|-7.398***|-7.518***|
|||(1.116)||(1.485)|(1.475)|(1.487)|(1.483)|(1.483)|
|Inflation (t-1)||0.060||1.077*|1.061*|1.091*|0.968|1.098*|
|||(0.397)||(0.630)|(0.615)|(0.631)|(0.619)|(0.628)|
|U.S. Interest rate||0.027||0.005|-0.013|0.006|-0.010|0.003|
|||(0.029)||(0.038)|(0.039)|(0.038)|(0.038)|(0.038)|
|**Political factors**|||||||||
|Gini|||0.031**|0.028**|0.026**|0.019|0.030**|0.028**|
||||(0.012)|(0.012)|(0.012)|(0.021)|(0.012)|(0.012)|
|Rule of law|||0.115|0.152|0.093|0.157|-0.432**|0.148|
||||(0.104)|(0.118)|(0.119)|(0.119)|(0.217)|(0.119)|
|Margin of Majority|||-0.441|-0.360|-0.355|-0.354|-0.335|0.543|
||||(0.392)|(0.404)|(0.400)|(0.404)|(0.403)|(0.775)|
|Election's year|||-0.043|-0.058|-0.050|-0.058|-0.055|-0.062|
||||(0.103)|(0.106)|(0.107)|(0.106)|(0.106)|(0.106)|
|**Interactions**|||||||||
|EMEs * Rigidity|||||-0.228***<br>(0.041)||||
|Gini * Rigidity||||||0.001<br>(0.001)|||
|Rule of law * Rigidity|||||||0.024***<br>(0.008)||
|Majority * Rigidity||||||||-0.053<br>(0.039)|
|Observations|3,046|2,911|2,066|2,007|2,007|2,007|2,007|2,007|
|Number of ifscode|147|145|103|102|102|102|102|102|
|Country FE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|r2_p<br>Standard errors in par<br>*** p<0.01, ** p<0.05|0.0235<br>entheses<br>, * p<0.1|0.0373|0.0276|0.0432|0.0581|0.0433|0.0478|0.0440|

- 62 -
Table 34

|Dependent variable: Nee|d of fiscal|adjustment|based on E|scolano et|al.(2014)||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure minus|0.341***|0.367***|0.369***|0.375***|0.606***|0.787***|-0.042|0.403***|
|**Economic factors**<br>structural as % GDP|(0.037)|(0.045)|(0.041)|(0.047)|(0.094)|(0.186)|(0.124)|(0.140)|
|GDP growth (t-1)||-26.612***<br>(3.497)||-25.740***<br>(3.720)|-24.202***<br>(3.774)|-25.364***<br>(3.834)|-24.277**<br>(3.759)|*-25.700***<br>(3.727)|
|Inflation (t-1)||-12.074***||-10.558***|-9.418**|-10.984***|-9.698**|-10.616***|
|||(3.597)||(3.754)|(3.732)|(3.769)|(3.837)|(3.770)|
|U.S. Interest rate||-0.146*||-0.199**|-0.305***|-0.271**|-0.298***|-0.197**|
|||(0.084)||(0.100)|(0.108)|(0.105)|(0.106)|(0.100)|
|**Political factors**|||||||||
|Gini|||0.108***|0.094***|0.077**|0.173***|0.083**|0.095***|
||||(0.033)|(0.036)|(0.036)|(0.050)|(0.036)|(0.037)|
|Rule of law|||0.144|0.196|0.128|0.198|-0.875*|0.192|
||||(0.259)|(0.332)|(0.336)|(0.334)|(0.453)|(0.332)|
|Margin of Majority|||1.266|1.561|1.705|1.702|1.720|2.033|
||||(1.043)|(1.118)|(1.118)|(1.135)|(1.112)|(2.476)|
|Election's year|||0.229|0.406*|0.446*|0.431*|0.435*|0.408*|
||||(0.211)|(0.231)|(0.233)|(0.232)|(0.233)|(0.231)|
|**Interactions**|||||||||
|EMEs * Deviation|||||-0.383***<br>(0.114)||||
|Gini * Deviation||||||-0.010**<br>(0.004)|||
|Rule of law * Deviation|||||||0.107***<br>(0.031)||
|Majority * Deviation||||||||-0.047<br>(0.220)|
|Observations|1,065|1,053|957|947|947|947|947|947|
|Number of ifscode|60|60|53|53|53|53|53|53|
|Country FE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|r2_p<br>Standard errors in parent<br>*** p<0.01, ** p<0.05, *|0.161<br>heses<br>p<0.1|0.307|0.193|0.320|0.341|0.329|0.342|0.320|

- 63 -
Table 35

|Dependent variable: Nee|d of fiscal|adjustment|based on d|ebt/revenu|e||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure minus|0.051***|0.037**|0.058***|0.042**|0.173***|0.132*|-0.121**|0.070|
|structural as % GDP|(0.014)|(0.015)|(0.018)|(0.019)|(0.034)|(0.069)|(0.054)|(0.050)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-7.299***||-9.008***|-8.035***|-8.914***|-8.732***|-8.978***|
|||(1.166)||(1.526)|(1.523)|(1.529)|(1.527)|(1.526)|
|Inflation (t-1)||0.044||1.358**|1.234*|1.289**|1.191*|1.370**|
|||(0.400)||(0.644)|(0.631)|(0.644)|(0.633)|(0.644)|
|U.S. Interest rate||-0.032||-0.067*|-0.088**|-0.073*|-0.086**|-0.067*|
|||(0.030)||(0.039)|(0.039)|(0.039)|(0.039)|(0.039)|
|**Political factors**|||||||||
|Gini|||0.029**|0.029**|0.027**|0.042***|0.030**|0.029**|
||||(0.012)|(0.013)|(0.013)|(0.016)|(0.013)|(0.013)|
|Rule of law|||0.062|0.178|0.153|0.163|-0.161|0.180|
||||(0.108)|(0.121)|(0.122)|(0.122)|(0.160)|(0.121)|
|Margin of Majority|||-0.714*|-0.633|-0.572|-0.660|-0.597|-0.337|
||||(0.406)|(0.419)|(0.418)|(0.419)|(0.419)|(0.639)|
|Election's year|||-0.043|-0.036|-0.026|-0.032|-0.029|-0.038|
||||(0.105)|(0.107)|(0.108)|(0.107)|(0.107)|(0.107)|
|**Interactions**|||||||||
|EMEs * Deviation|||||-0.210***<br>(0.043)||||
|Gini * Deviation||||||-0.002<br>(0.002)|||
|Rule of law * Deviation|||||||0.040***<br>(0.012)||
|Majority * Deviation||||||||-0.048<br>(0.078)|
|Observations|2,798|2,738|1,949|1,918|1,918|1,918|1,918|1,918|
|Number of ifscode|137|137|98|98|98|98|98|98|
|Country FE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|r2_p<br>Standard errors in parent<br>*** p<0.01, ** p<0.05, *|0.00444<br>heses<br>p<0.1|0.0209|0.00939|0.0338|0.0460|0.0347|0.0389|0.0340|

- 64 -
Table 36

|Dependent variable: Fi|scal adjust|ment when|needed b|ased on Esc|olano et al|.(2014)|||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure|-0.085|-0.117|-0.082|-0.161|-0.127|0.710|-0.551|-0.481**|
|(% of GDP)|(0.097)|(0.133)|(0.112)|(0.162)|(0.255)|(0.493)|(0.389)|(0.237)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-1.308||1.757|2.106|3.416|2.141|1.373|
|||(7.427)||(8.017)|(8.324)|(8.739)|(8.525)|(8.293)|
|Inflation (t-1)||20.772*||25.758**|25.280**|27.675**|20.914|28.117**|
|||(10.786)||(12.509)|(12.744)|(13.258)|(12.981)|(13.476)|
|U.S. Interest rate||-0.768**||-1.130***|-1.134***|-1.322***|-1.292***|-1.374***|
|||(0.307)||(0.421)|(0.422)|(0.451)|(0.458)|(0.483)|
|**Political factors**|||||||||
|Gini|||0.070|0.089|0.094|0.626*|0.089|-0.026|
||||(0.127)|(0.278)|(0.278)|(0.341)|(0.270)|(0.184)|
|Rule of law|||-1.195|1.231|1.223|1.426|-1.258|1.753|
||||(0.735)|(1.120)|(1.115)|(1.154)|(2.405)|(1.259)|
|Margin of Majority|||4.471|3.348|3.417|5.389|4.741|-13.440|
||||(3.234)|(3.620)|(3.655)|(4.026)|(3.992)|(9.192)|
|Election's year|||-0.697|-0.480|-0.459|-0.316|-0.325|-0.428|
||||(0.512)|(0.550)|(0.563)|(0.576)|(0.570)|(0.581)|
|**Interactions**|||||||||
|EMEs * Rigidity|||||-0.058<br>(0.346)||||
|Gini * Rigidity||||||-0.021*<br>(0.013)|||
|Rule of law * Rigidity|||||||0.090<br>(0.077)||
|Majority * Rigidity||||||||0.592*<br>(0.317)|
|Observations|111|110|98|97|97|97|97|97|
|Number of ifscode|21|21|18|18|18|18|18|18|
|Country FE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|r2_p<br>Standard errors in pare<br>*** p<0.01, ** p<0.05,|0.0103<br>ntheses<br>* p<0.1|0.160|0.102|0.238|0.239|0.272|0.255|0.278|

- 65 -
Table 37

|Dependent variable: F|iscal adjust|ment when|needed ba|sed on deb|t/revenue||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure|-0.026|-0.042|-0.053|-0.066|-0.059|-0.030|-0.200**|-0.125*|
|(% of GDP)|(0.030)|(0.033)|(0.038)|(0.041)|(0.059)|(0.091)|(0.095)|(0.067)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-3.374||-1.430|-1.380|-1.383|-1.189|-1.478|
|||(2.492)||(3.026)|(3.041)|(3.027)|(3.032)|(3.033)|
|Inflation (t-1)||-0.095||0.277|0.267|0.278|0.144|0.220|
|||(0.849)||(1.592)|(1.596)|(1.594)|(1.613)|(1.601)|
|U.S. Interest rate||-0.130**||-0.159**|-0.162**|-0.166**|-0.197**|-0.158**|
|||(0.060)||(0.074)|(0.075)|(0.075)|(0.078)|(0.074)|
|**Political factors**|||||||||
|Gini|||0.024|0.024|0.024|0.042|0.027|0.027|
||||(0.027)|(0.027)|(0.027)|(0.049)|(0.027)|(0.027)|
|Rule of law|||-0.273|-0.092|-0.095|-0.101|-0.911|-0.087|
||||(0.246)|(0.270)|(0.271)|(0.272)|(0.591)|(0.271)|
|Margin of Majority|||1.786*|1.995*|1.999*|1.977*|2.157**|-0.049|
||||(1.036)|(1.073)|(1.074)|(1.076)|(1.090)|(2.107)|
|Election's year|||-0.234|-0.270|-0.270|-0.271|-0.264|-0.268|
||||(0.209)|(0.211)|(0.211)|(0.211)|(0.211)|(0.212)|
|**Interactions**|||||||||
|EMEs * Rigidity|||||-0.015<br>(0.081)||||
|Gini * Rigidity||||||-0.001<br>(0.002)|||
|Rule of law * Rigidity|||||||0.029<br>(0.019)||
|Majority * Rigidity||||||||0.099<br>(0.089)|
|Observations|798|790|583|579|579|579|579|579|
|Number of ifscode|102|102|75|75|75|75|75|75|
|Country FE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|r2_p<br>Standard errors in par<br>*** p<0.01, ** p<0.05|0.00118<br>entheses<br>, * p<0.1|0.0127|0.0178|0.0297|0.0297|0.0301|0.0348|0.0322|

- 66 -
Table 38

|Dependent variable: Fisca|l adjustme|nt when nee|ded based|on Escolan|o et al.(20|14)|||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure minus|-0.279**|-0.264*|-0.300*|-0.324*|-0.172|1.029|-1.088*|-0.707|
|structural as % GDP|(0.139)|(0.154)|(0.161)|(0.177)|(0.282)|(0.692)|(0.568)|(0.497)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-0.957||-0.168|1.374|3.592|1.757|0.078|
|||(8.219)||(8.383)|(9.042)|(9.841)|(9.446)|(8.447)|
|Inflation (t-1)||19.399*||25.158**|24.763*|29.131**|20.231|25.211**|
|||(11.390)||(12.745)|(12.844)|(14.276)|(13.535)|(12.840)|
|U.S. Interest rate||-0.940***||-1.090***|-1.125***|-1.220***|-1.327***|-1.183***|
|||(0.351)||(0.423)|(0.433)|(0.450)|(0.478)|(0.449)|
|**Political factors**|||||||||
|Gini|||0.021|0.010|0.028|0.412|0.010|-0.007|
||||(0.125)|(0.250)|(0.294)|(0.338)|(0.325)|(0.219)|
|Rule of law|||-1.132|1.229|1.216|1.359|-0.528|1.509|
||||(0.741)|(1.109)|(1.115)|(1.171)|(1.660)|(1.184)|
|Margin of Majority|||3.731|3.076|3.489|6.204|5.454|-3.350|
||||(3.460)|(3.909)|(4.070)|(4.703)|(4.608)|(8.392)|
|Election's year|||-0.675|-0.414|-0.336|-0.282|-0.253|-0.391|
||||(0.526)|(0.562)|(0.572)|(0.591)|(0.578)|(0.569)|
|**Interactions**|||||||||
|EMEs * Deviation|||||-0.240<br>(0.376)||||
|Gini * Deviation||||||-0.032*<br>(0.018)|||
|Rule of law * Deviation|||||||0.176<br>(0.112)||
|Majority * Deviation||||||||0.606<br>(0.723)|
|Observations|106|105|98|97|97|97|97|97|
|Number of ifscode|20|20|18|18|18|18|18|18|
|Country FE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|r2_p<br>Standard errors in parent<br>*** p<0.01, ** p<0.05, *|0.0598<br>heses<br>p<0.1|0.224|0.149|0.272|0.277|0.315|0.300|0.280|

- 67 -
Table 39

|Dependent variable: Fisc|al adjustme|nt when ne|eded based|on debt/re|venue||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure minus|-0.055|-0.077**|-0.098**|-0.122**|-0.108*|-0.028|-0.238|-0.210*|
|structural as % GDP|(0.033)|(0.038)|(0.044)|(0.050)|(0.063)|(0.161)|(0.166)|(0.128)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-3.049||-1.913|-1.893|-1.943|-1.975|-1.971|
|||(2.533)||(3.101)|(3.105)|(3.103)|(3.101)|(3.102)|
|Inflation (t-1)||-0.123||-0.164|-0.245|-0.220|-0.374|-0.203|
|||(0.857)||(1.647)|(1.670)|(1.653)|(1.685)|(1.652)|
|U.S. Interest rate||-0.152**||-0.189**|-0.194**|-0.200**|-0.207**|-0.188**|
|||(0.063)||(0.079)|(0.080)|(0.081)|(0.083)|(0.079)|
|**Political factors**|||||||||
|Gini|||0.027|0.026|0.025|0.042|0.027|0.028|
||||(0.027)|(0.028)|(0.028)|(0.038)|(0.028)|(0.028)|
|Rule of law|||-0.349|-0.154|-0.152|-0.164|-0.386|-0.172|
||||(0.261)|(0.282)|(0.283)|(0.284)|(0.427)|(0.284)|
|Margin of Majority|||2.404**|2.732**|2.749**|2.720**|2.785**|1.576|
||||(1.101)|(1.156)|(1.159)|(1.161)|(1.166)|(1.913)|
|Election's year|||-0.238|-0.273|-0.274|-0.278|-0.270|-0.271|
||||(0.214)|(0.217)|(0.217)|(0.217)|(0.217)|(0.217)|
|**Interactions**|||||||||
|EMEs * Deviation|||||-0.034<br>(0.096)||||
|Gini * Deviation||||||-0.003<br>(0.004)|||
|Rule of law * Deviation|||||||0.025<br>(0.035)||
|Majority * Deviation||||||||0.149<br>(0.199)|
|Observations|758|750|554|550|550|550|550|550|
|Number of ifscode|100|100|74|74|74|74|74|74|
|Country FE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|r2_p<br>Standard errors in parent<br>*** p<0.01, ** p<0.05, *|0.00456<br>heses<br>p<0.1|0.0181|0.0303|0.0478|0.0481|0.0486|0.0490|0.0491|

- 68 -
# Appendix 6: Model with sample selection correction Table 40

|Dependent variable: Fiscal adj|ustment w|hen neede|d based on|Escolano e|t al.(2014)|
|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|
|Rigid expenditure|0.020**|0.027**|0.035*|-0.010|0.038|
|(% of GDP)|(0.009)|(0.013)|(0.018)|(0.017)|(0.023)|
|**Economic factors**||||||
|GDP growth (t-1)|-7.068**|-5.267*|-6.461**|-5.847*|-6.908**|
||(3.007)|(3.067)|(3.015)|(3.022)|(2.977)|
|Inflation (t-1)|-1.174|-0.506|-0.937|-0.046|-1.107|
||(0.988)|(1.223)|(1.054)|(1.123)|(0.973)|
|U.S. Interest rate|-0.107***|-0.107***|-0.116***|-0.121***|-0.104***|
||(0.036)|(0.034)|(0.034)|(0.036)|(0.036)|
|**Political factors**||||||
|Gini|0.020***|0.016**|0.031**|0.017**|0.021***|
||(0.007)|(0.006)|(0.012)|(0.007)|(0.008)|
|Rule of law|0.001|0.030|0.013|-0.171*|0.002|
||(0.057)|(0.051)|(0.056)|(0.094)|(0.057)|
|Margin of Majority|0.852**|0.622|0.795**|0.689*|1.514*|
||(0.387)|(0.382)|(0.368)|(0.389)|(0.890)|
|**Interactions**||||||
|EMEs||0.619||||
|||(0.441)||||
|EMEs * Rigidity||-0.018<br>(0.012)||||
|Gini * Rigidity|||-0.000<br>(0.001)|||
|Rule of law * Rigidity||||0.007**<br>(0.003)||
|Majority * Rigidity|||||-0.029|
||||||(0.027)|
|lambda|0.668**|0.477|0.591*|0.521*|0.659**|
||(0.307)|(0.309)|(0.308)|(0.310)|(0.308)|
|Constant|-2.163**|-2.081**|-2.427***|-1.053|-2.635**|
||(0.839)|(1.001)|(0.693)|(0.999)|(1.173)|
|Observations|163|163|163|163|163|
|R-squared|0.120|0.153|0.149|0.152|0.120|
|CountryFE|No|No|No|No|No|
|Standard errors in parenthese|s|||||
|*** p<0.01, ** p<0.05, * p<0.1||||||

- 69 -
Table 41

|Dependent variable: Fis|cal adjustm|ent when n|eeded base|d on debt/|revenue|
|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|
|Rigid expenditure|0.003<br>|-0.008|0.001|0.005|-0.008|
|(% of GDP)|(0.003)|(0.011)|(0.010)|(0.010)|(0.014)|
|**Economic factors**||||||
|GDP growth (t-1)|3.803|4.782|3.811|4.094|3.957|
||(2.999)|(3.212)|(2.997)|(3.187)|(2.911)|
|Inflation (t-1)|-0.332**|-0.385*|-0.335**|-0.349*|-0.333**|
||(0.168)|(0.200)|(0.170)|(0.188)|(0.165)|
|U.S. Interest rate|-0.018|-0.011|-0.018|-0.018|-0.018|
||(0.012)|(0.016)|(0.013)|(0.016)|(0.012)|
|**Political factors**||||||
|Gini|-0.003|-0.005|-0.004|-0.004|-0.004|
||(0.004)|(0.005)|(0.008)|(0.005)|(0.004)|
|Rule of law|-0.008|-0.032|-0.008|0.005|-0.006|
||(0.030)|(0.036)|(0.029)|(0.044)|(0.026)|
|Margin of Majority|-0.059|-0.045|-0.067|-0.062|-0.357|
||(0.110)|(0.108)|(0.105)|(0.104)|(0.312)|
|**Interactions**||||||
|emes||-0.461||||
|||(0.379)||||
|EMEs * Rigidity||0.014<br>(0.014)||||
|Gini * Rigidity|||0.000|||
||||(0.000)|||
|Rule of law * Rigidity||||-0.001<br>(0.003)||
|Majority * Rigidity|||||0.016<br>(0.019)|
|lambda|-1.202|-1.540|-1.207|-1.312|-1.257|
||(0.892)|(0.992)|(0.899)|(0.973)|(0.874)|
|Constant|1.559|2.378|1.601|1.658*|1.834|
||(1.042)|(1.452)|(1.172)|(0.938)|(1.235)|
|Observations|755|755|755|755|755|
|R-squared|0.074|0.081|0.075|0.082|0.075|
|CountryFE|No|No|No|No|No|
|Standard errors in pare|ntheses|||||
|*** p<0.01, ** p<0.05,|* p<0.1|||||

- 70 -
Table 42

|Dependent variable: Fiscal adju|stment wh|en needed|based on E|scolano et|al.(2014)|
|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|
|Rigid expenditure minus|0.026|0.014|0.073**|-0.021|0.047|
|structural as % GDP|(0.022)|(0.024)|(0.030)|(0.034)|(0.046)|
|**Economic factors**||||||
|GDP growth (t-1)|-4.827**|-2.283|-4.534*|-3.709|-4.139*|
||(2.415)|(2.214)|(2.499)|(2.454)|(2.249)|
|Inflation (t-1)|-0.216|0.866|-0.002|0.757|0.056|
||(1.044)|(1.150)|(1.087)|(1.164)|(0.991)|
|U.S. Interest rate|-0.083***|-0.075**|-0.095***|-0.088***|-0.076**|
||(0.032)|(0.029)|(0.031)|(0.032)|(0.031)|
|**Political factors**||||||
|Gini|0.015**|0.009|0.028***|0.012|0.014**|
||(0.007)|(0.006)|(0.008)|(0.007)|(0.007)|
|Rule of law|0.055|0.063|0.060|-0.021|0.067|
||(0.051)|(0.044)|(0.051)|(0.069)|(0.049)|
|Margin of Majority|0.577|0.302|0.563|0.408|0.864|
||(0.362)|(0.320)|(0.358)|(0.369)|(0.699)|
|**Interactions**||||||
|EMEs||0.126||||
|||(0.305)||||
|EMEs * Deviation||-0.027<br>(0.019)||||
|Gini * Deviation|||-0.001|||
||||(0.001)|||
|Rule of law * Deviation||||0.009*<br>(0.005)||
|Majority * Deviation|||||-0.043|
||||||(0.054)|
|lambda|0.453*|0.170|0.402|0.303|0.377|
||(0.271)|(0.240)|(0.279)|(0.279)|(0.254)|
|Constant|-1.556*|-0.677|-1.900***|-0.725|-1.612|
||(0.802)|(0.836)|(0.717)|(0.910)|(0.975)|
|Observations|162|162|162|162|162|
|R-squared|0.113|0.150|0.149|0.128|0.110|
|CountryFE<br>Standard errors in parentheses<br>*** p<0.01, ** p<0.05, * p<0.1|No|No|No|No|No|

- 71 -
Table 43

|Dependent variable: Fiscal|adjustmen|t when nee|ded based|on debt/rev|enue|
|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|
|Rigid expenditure minus|0.001|-0.045|-0.046|0.039|-0.013|
|structural as % GDP|(0.005)|(0.029)|(0.043)|(0.039)|(0.025)|
|**Economic factors**||||||
|GDP growth (t-1)|4.911|6.502*|4.915|5.473|5.097|
||(3.956)|(3.774)|(3.983)|(4.096)|(3.905)|
|Inflation (t-1)|-0.416*|-0.567**|-0.414*|-0.472*|-0.428*|
||(0.222)|(0.270)|(0.222)|(0.256)|(0.225)|
|U.S. Interest rate|-0.004|0.021|0.001|0.007|-0.003|
||(0.023)|(0.032)|(0.027)|(0.032)|(0.023)|
|**Political factors**||||||
|Gini|-0.004|-0.006|-0.013|-0.006|-0.004|
||(0.004)|(0.005)|(0.012)|(0.005)|(0.004)|
|Rule of law|-0.002|-0.042|0.003|0.071|-0.002|
||(0.036)|(0.042)|(0.033)|(0.052)|(0.035)|
|Margin of Majority|-0.013|0.043|-0.042|-0.009|-0.161|
||(0.173)|(0.165)|(0.156)|(0.166)|(0.178)|
|**Interactions**||||||
|EMEs||-0.794*||||
|||(0.440)||||
|EMEs * Deviation||0.073<br>(0.045)||||
|Gini * Deviation|||0.001<br>(0.001)|||
|Rule of law * Deviation||||-0.010<br>(0.010)||
|Majority * Deviation|||||0.022<br>(0.036)|
|lambda|-1.435|-2.013*|-1.467|-1.647|-1.489|
||(1.077)|(1.115)|(1.108)|(1.162)|(1.068)|
|Constant|1.758|3.036**|2.134|1.734*|1.923|
||(1.116)|(1.492)|(1.422)|(0.942)|(1.240)|
|Observations|709|709|709|709|709|
|R-squared|0.063|0.070|0.063|0.067|0.064|
|CountryFE|No|No|No|No|No|
|Standard errors in parenth|eses|||||
|*** p<0.01, ** p<0.05, * p|<0.1|||||

- 72 -
Appendix 7: Linear probability model controlling for size of the need (primary gap) Table 44

|Dependent variable: F|iscal adju|stment whe|n needed b|ased on Esc|olano et a|l.(2014)|||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure|-0.015|-0.023***|-0.014|-0.027***|-0.016**|0.073**|-0.080***|-0.063***|
|(% of GDP)|(0.013)|(0.008)|(0.011)|(0.008)|(0.008)|(0.029)|(0.028)|(0.020)|
|Primary gap (t-1)|-0.004|0.003|0.001|-0.003|-0.004|-0.004|-0.003|-0.004|
||(0.010)|(0.006)|(0.010)|(0.008)|(0.008)|(0.007)|(0.008)|(0.008)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-0.307||0.736|0.848|0.731|0.611|0.725|
|||(1.360)||(1.246)|(1.224)|(1.252)|(1.227)|(1.279)|
|Inflation (t-1)||2.579***||2.706**|3.066***|2.976***|3.203***|2.552**|
|||(0.931)||(1.042)|(1.057)|(1.032)|(0.965)|(1.113)|
|U.S. Interest rate||-0.124**||-0.159**|-0.178**|-0.206***|-0.194**|-0.174***|
|||(0.051)||(0.064)|(0.074)|(0.060)|(0.073)|(0.052)|
|**Political factors**|||||||||
|Gini|||0.010|0.013|0.016|0.081***|0.015|0.007|
||||(0.011)|(0.012)|(0.012)|(0.023)|(0.012)|(0.011)|
|Rule of law|||-0.218**|0.110|0.167|0.183|-0.106|0.113|
||||(0.086)|(0.142)|(0.162)|(0.144)|(0.139)|(0.143)|
|Margin of Majority|||0.509|0.269|0.259|0.474|0.258|-1.475*|
||||(0.443)|(0.397)|(0.387)|(0.366)|(0.384)|(0.794)|
|Election's year|||-0.111|-0.097|-0.089|-0.078|-0.087|-0.083|
||||(0.080)|(0.078)|(0.075)|(0.075)|(0.079)|(0.081)|
|**Interactions**|||||||||
|EMEs * Rigidity|||||-0.034<br>(0.030)||||
|Gini * Rigidity||||||-0.003***<br>(0.001)|||
|Rule of law * Rigidity|||||||0.011**<br>(0.005)||
|Majority * Rigidity||||||||0.073*<br>(0.042)|
|Constant|0.611|1.191***|0.791|0.314|0.164|-2.660**|1.288|1.447|
||(0.395)|(0.305)|(0.971)|(1.004)|(0.962)|(1.293)|(1.016)|(0.983)|
|Observations|185|183|165|163|163|163|163|163|
|R-squared|0.009|0.115|0.073|0.160|0.169|0.192|0.178|0.189|
|Number of ifscode|60|60|53|53|53|53|53|53|
|CountryFE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Robust standard error|s clustere|d by country|in parent|heses|||||
|*** p<0.01, ** p<0.05|, * p<0.1||||||||

- 73 -
Table 45

|Dependent variable: F|iscal adjus|tment whe|n needed b|ased on de|bt/revenue||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure|-0.011|-0.009|-0.010|-0.008|-0.009|-0.012|-0.018|-0.021|
|(% of GDP)|(0.007)|(0.008)|(0.008)|(0.008)|(0.012)|(0.022)|(0.018)|(0.014)|
|Primary gap (t-1)|0.001|0.006|0.001|0.004|0.004|0.004|0.004|0.005|
||(0.003)|(0.005)|(0.003)|(0.005)|(0.005)|(0.005)|(0.005)|(0.005)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-0.669||-0.271|-0.284|-0.276|-0.233|-0.301|
|||(0.835)||(0.872)|(0.879)|(0.874)|(0.892)|(0.868)|
|Inflation (t-1)||-0.038||0.031|0.026|0.031|0.046|-0.013|
|||(0.206)||(0.201)|(0.205)|(0.201)|(0.208)|(0.200)|
|U.S. Interest rate||-0.028*||-0.026|-0.026|-0.025|-0.030|-0.027|
|||(0.017)||(0.019)|(0.021)|(0.020)|(0.022)|(0.020)|
|**Political factors**|||||||||
|Gini|||0.006|0.006|0.006|0.004|0.006|0.006|
||||(0.007)|(0.007)|(0.007)|(0.014)|(0.007)|(0.007)|
|Rule of law|||-0.027|0.001|0.001|0.000|-0.062|0.003|
||||(0.061)|(0.071)|(0.071)|(0.070)|(0.108)|(0.071)|
|Margin of Majority|||0.456*|0.442*|0.440*|0.438*|0.442*|-0.086|
||||(0.234)|(0.231)|(0.231)|(0.234)|(0.232)|(0.379)|
|Election's year|||-0.031|-0.030|-0.030|-0.030|-0.030|-0.027|
||||(0.041)|(0.042)|(0.042)|(0.042)|(0.042)|(0.041)|
|**Interactions**|||||||||
|EMEs * Rigidity|||||0.002<br>(0.016)||||
|Gini * Rigidity||||||0.000<br>(0.000)|||
|Rule of law * Rigidity|||||||0.002<br>(0.004)||
|Majority * Rigidity||||||||0.023<br>|
|||||||||(0.019)|
|Constant|0.613***|0.689***|0.226|0.178|0.183|0.287|0.451|0.476|
||(0.184)|(0.231)|(0.511)|(0.525)|(0.528)|(0.715)|(0.568)|(0.545)|
|Observations|562|559|504|503|503|503|503|503|
|R-squared|0.005|0.013|0.014|0.021|0.021|0.021|0.021|0.024|
|Number of ifscode|84|84|75|75|75|75|75|75|
|CountryFE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Robust standard erro|rs clustere|d by country|in parent|heses|||||
|***p<0.01,**p<0.0|5,*p<0.1||||||||

- 74 -
Table 46

|Dependent variable: Fisca|l adjustmen|t when nee|ded based|on Escolan|o et al.(201|4)|||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure minus|-0.034***|-0.030***|-0.033***|-0.035***|-0.023***|0.083**|-0.098***|-0.067|
|structural as % GDP|(0.011)|(0.008)|(0.009)|(0.010)|(0.006)|(0.035)|(0.032)|(0.051)|
|Primary gap (t-1)|-0.005|0.002|-0.001|-0.003|-0.004|-0.004|-0.003|-0.003|
||(0.009)|(0.006)|(0.009)|(0.007)|(0.007)|(0.007)|(0.007)|(0.008)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-0.095||0.369|0.532|0.419|0.424|0.377|
|||(1.325)||(1.323)|(1.327)|(1.336)|(1.318)|(1.341)|
|Inflation (t-1)||2.832***||3.213***|3.493***|3.486***|3.531***|3.166***|
|||(0.873)||(1.120)|(1.109)|(1.091)|(1.090)|(1.154)|
|U.S. Interest rate||-0.136**||-0.148**|-0.160**|-0.164***|-0.170**|-0.155**|
|||(0.051)||(0.065)|(0.067)|(0.061)|(0.069)|(0.059)|
|**Political factors**|||||||||
|Gini|||0.006|0.006|0.006|0.030**|0.006|0.005|
||||(0.011)|(0.013)|(0.013)|(0.014)|(0.014)|(0.012)|
|Rule of law|||-0.203**|0.119|0.162|0.168|0.064|0.128|
||||(0.084)|(0.150)|(0.151)|(0.146)|(0.142)|(0.151)|
|Margin of Majority|||0.393|0.170|0.126|0.248|0.131|-0.331|
||||(0.419)|(0.387)|(0.383)|(0.367)|(0.379)|(0.619)|
|Election's year|||-0.111|-0.086|-0.075|-0.055|-0.082|-0.084|
||||(0.079)|(0.077)|(0.073)|(0.074)|(0.076)|(0.080)|
|**Interactions**|||||||||
|EMEs * Deviation|||||-0.042<br>(0.025)||||
|Gini * Deviation||||||-0.003***<br>(0.001)|||
|Rule of law * Deviation|||||||0.013**<br>(0.006)||
|Majority * Deviation||||||||0.059<br>|
|||||||||(0.097)|
|Constant|0.561***|0.905***|0.927|0.161|0.143|-0.968|0.565|0.477|
||(0.149)|(0.200)|(0.923)|(1.029)|(1.000)|(1.054)|(1.027)|(0.912)|
|Observations|182|180|164|162|162|162|162|162|
|R-squared|0.040|0.157|0.100|0.180|0.192|0.212|0.195|0.185|
|Number of ifscode|60|60|53|53|53|53|53|53|
|CountryFE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Robust standard errors cl<br>*** p<0.01, ** p<0.05, *|ustered by c<br>p<0.1|ountry in p|arentheses||||||

- 75 -
Table 47

|Dependent variable: Fisca|l adjustment|when need|ed based o|n debt/rev|enue||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure minus|-0.024***|-0.022**|-0.025***|-0.022**|-0.018|-0.011|-0.022|-0.047*|
|structural as % GDP|(0.007)|(0.009)|(0.008)|(0.009)|(0.012)|(0.028)|(0.029)|(0.025)|
|Primary gap (t-1)|-0.000|0.004|-0.001|0.003|0.003|0.003|0.003|0.003|
||(0.003)|(0.005)|(0.003)|(0.005)|(0.005)|(0.005)|(0.005)|(0.005)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-0.445||-0.271|-0.216|-0.257|-0.271|-0.317|
|||(0.838)||(0.918)|(0.939)|(0.922)|(0.951)|(0.921)|
|Inflation (t-1)||0.064||0.131|0.154|0.141|0.131|0.066|
|||(0.209)||(0.202)|(0.212)|(0.208)|(0.209)|(0.213)|
|U.S. Interest rate||-0.035**||-0.035*|-0.037*|-0.037*|-0.035|-0.037*|
|||(0.017)||(0.020)|(0.021)|(0.021)|(0.023)|(0.021)|
|**Political factors**|||||||||
|Gini|||0.005|0.005|0.005|0.008|0.005|0.006|
||||(0.007)|(0.007)|(0.007)|(0.009)|(0.007)|(0.007)|
|Rule of law|||-0.044|-0.008|-0.005|-0.007|-0.008|-0.006|
||||(0.062)|(0.075)|(0.076)|(0.076)|(0.089)|(0.075)|
|Margin of Majority|||0.508**|0.491**|0.502**|0.495**|0.491**|0.135|
||||(0.239)|(0.237)|(0.238)|(0.238)|(0.238)|(0.323)|
|Election's year|||-0.029|-0.027|-0.028|-0.028|-0.027|-0.024|
||||(0.043)|(0.044)|(0.044)|(0.044)|(0.044)|(0.043)|
|**Interactions**|||||||||
|EMEs * Deviation|||||-0.011<br>(0.016)||||
|Gini * Deviation||||||-0.000<br>(0.001)|||
|Rule of law * Deviation|||||||0.000<br>(0.007)||
|Majority * Deviation||||||||0.045|
|||||||||(0.041)|
|Constant|0.548***|0.675***|0.298|0.242|0.234|0.139|0.242|0.433|
||(0.070)|(0.108)|(0.474)|(0.506)|(0.509)|(0.574)|(0.519)|(0.517)|
|Observations|534|531|480|479|479|479|479|479|
|R-squared|0.015|0.025|0.027|0.037|0.038|0.037|0.037|0.039|
|Number of ifscode|83|83|74|74|74|74|74|74|
|CountryFE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Robust standard errors clu|stered by co|untry in pa|rentheses||||||
|***p<0.01,**p<0.05,*p|<0.1||||||||

- 76 -
Appendix 8: Linear probability model with dependent variable identified as Lavigne (2011) Table 48

|Dependent variable: N|eed of fisca|l adjustme|nt based o|n Lavigne(2|011)||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure|0.029***|0.032***|0.041***|0.043***|0.041***|0.037***|0.031***|0.040***|
|(% of GDP)|(0.006)|(0.006)|(0.005)|(0.006)|(0.009)|(0.011)|(0.011)|(0.009)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-0.217||-0.136|-0.152|-0.140|-0.111|-0.144|
|||(0.231)||(0.266)|(0.261)|(0.267)|(0.262)|(0.263)|
|Inflation (t-1)||0.358**||0.601***|0.606***|0.604***|0.581***|0.604***|
|||(0.146)||(0.130)|(0.129)|(0.129)|(0.128)|(0.130)|
|U.S. Interest rate||0.009||-0.002|-0.002|-0.002|-0.003|-0.002|
|||(0.011)||(0.013)|(0.012)|(0.012)|(0.012)|(0.013)|
|**Political factors**|||||||||
|Gini|||-0.007***|-0.006**|-0.006**|-0.009*|-0.006**|-0.006**|
||||(0.003)|(0.003)|(0.003)|(0.005)|(0.003)|(0.003)|
|Rule of law|||0.025|0.030|0.031|0.031|-0.040|0.030|
||||(0.040)|(0.041)|(0.041)|(0.041)|(0.066)|(0.041)|
|Margin of Majority|||0.015|0.033|0.034|0.037|0.034|-0.041|
||||(0.106)|(0.111)|(0.111)|(0.111)|(0.112)|(0.212)|
|Election's year|||-0.003|-0.001|-0.001|-0.001|-0.001|-0.000|
||||(0.011)|(0.011)|(0.011)|(0.011)|(0.011)|(0.011)|
|**Interactions**|||||||||
|EMEs * Rigidity|||||0.003<br>(0.011)||||
|Gini * Rigidity||||||0.000|||
|||||||(0.000)|||
|Rule of law * Rigidity|||||||0.003<br>(0.003)||
|Majority * Rigidity||||||||0.004<br>(0.011)|
|Constant|-0.384***|-0.495***|-0.542**|-0.651***|-0.648***|-0.553**|-0.418|-0.609**|
||(0.129)|(0.144)|(0.225)|(0.231)|(0.233)|(0.278)|(0.267)|(0.249)|
|Observations|2,474|2,462|1,824|1,819|1,819|1,819|1,819|1,819|
|R-squared|0.076|0.086|0.129|0.143|0.143|0.143|0.146|0.143|
|Number of ifscode|127|127|97|97|97|97|97|97|
|CountryFE<br>Robust standard error<br>*** p<0.01, ** p<0.05|Yes<br>s clustered<br>, * p<0.1|Yes<br>by country|Yes<br>in parenthe|Yes<br>ses|Yes|Yes|Yes|Yes|

- 77 -
Table 49

|Dependent variable:|Fiscal adjus|tment whe|n needed b|ased on La|vigne(2011|)|||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure|-0.002|-0.003|-0.005*|-0.007*|-0.008|-0.005|0.000|-0.005|
|(% of GDP)|(0.001)|(0.002)|(0.003)|(0.003)|(0.005)|(0.005)|(0.004)|(0.003)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-0.022||-0.057|-0.081|-0.056|-0.095|-0.055|
|||(0.130)||(0.175)|(0.166)|(0.175)|(0.175)|(0.175)|
|Inflation (t-1)||-0.279||-0.389|-0.387|-0.387|-0.397|-0.389|
|||(0.209)||(0.260)|(0.262)|(0.261)|(0.260)|(0.260)|
|U.S. Interest rate||-0.006||-0.010|-0.010|-0.010|-0.010|-0.010|
|||(0.007)||(0.012)|(0.012)|(0.012)|(0.012)|(0.012)|
|**Political factors**|||||||||
|Gini|||0.000|-0.000|-0.000|0.000|-0.001|-0.000|
||||(0.000)|(0.001)|(0.001)|(0.002)|(0.001)|(0.001)|
|Rule of law|||-0.016|0.000|0.001|-0.000|0.050|0.001|
||||(0.018)|(0.025)|(0.024)|(0.026)|(0.040)|(0.025)|
|Margin of Majority|||-0.067|-0.071|-0.065|-0.074|-0.054|-0.028|
||||(0.050)|(0.055)|(0.053)|(0.061)|(0.052)|(0.072)|
|Election's year|||-0.017*|-0.023**|-0.023**|-0.023**|-0.023**|-0.023**|
||||(0.010)|(0.010)|(0.010)|(0.010)|(0.010)|(0.009)|
|**Interactions**|||||||||
|EMEs * Rigidity|||||0.002<br>(0.006)||||
|Gini * Rigidity||||||-0.000<br>(0.000)|||
|Rule of law * Rigidity|||||||-0.002<br>(0.001)||
|Majority * Rigidity||||||||-0.002<br>(0.004)|
|Constant|0.073**|0.135**|0.250*|0.328**|0.326**|0.311**|0.158|0.305**|
||(0.033)|(0.061)|(0.130)|(0.141)|(0.142)|(0.128)|(0.125)|(0.126)|
|Observations|687|677|485|482|482|482|482|482|
|R-squared|0.002|0.016|0.013|0.041|0.041|0.041|0.046|0.041|
|Number of ifscode|88|87|65|64|64|64|64|64|
|CountryFE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Robust standard erro<br>*** p<0.01, ** p<0.0|rs clustere<br>5, * p<0.1|d by countr|y in parent|heses|||||

- 78 -
Table 50

|Dependent variable: Nee|d of fiscal|adjustment|based on L|avigne(20|11)||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure minus|0.023***|0.024***|0.032***|0.033***|0.029***|0.026|0.021|0.032**|
|structural as % GDP|(0.006)|(0.006)|(0.006)|(0.006)|(0.011)|(0.019)|(0.018)|(0.013)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-0.333||-0.289|-0.328|-0.297|-0.263|-0.289|
|||(0.232)||(0.262)|(0.267)|(0.262)|(0.264)|(0.261)|
|Inflation (t-1)||0.353**||0.627***|0.642***|0.634***|0.605***|0.627***|
|||(0.155)||(0.139)|(0.138)|(0.138)|(0.138)|(0.137)|
|U.S. Interest rate||0.002||-0.014|-0.014|-0.014|-0.016|-0.014|
|||(0.011)||(0.013)|(0.013)|(0.013)|(0.013)|(0.013)|
|**Political factors**|||||||||
|Gini|||-0.006*|-0.005*|-0.005*|-0.006|-0.005*|-0.005*|
||||(0.003)|(0.003)|(0.003)|(0.004)|(0.003)|(0.003)|
|Rule of law|||0.026|0.042|0.043|0.043|0.020|0.042|
||||(0.042)|(0.045)|(0.045)|(0.045)|(0.046)|(0.045)|
|Margin of Majority|||0.038|0.057|0.058|0.060|0.056|0.053|
||||(0.114)|(0.118)|(0.117)|(0.117)|(0.120)|(0.171)|
|Election's year|||0.000|0.001|0.000|0.000|0.001|0.001|
||||(0.012)|(0.011)|(0.011)|(0.011)|(0.011)|(0.011)|
|**Interactions**|||||||||
|EMEs * Deviation|||||0.007<br>(0.013)||||
|Gini * Deviation||||||0.000<br>(0.000)|||
|Rule of law * Deviation|||||||0.003<br>(0.004)||
|Majority * Deviation||||||||0.001<br>(0.021)|
|Constant|0.061|0.041|0.083|0.005|0.001|0.040|0.088|0.007|
||(0.046)|(0.072)|(0.186)|(0.189)|(0.188)|(0.213)|(0.188)|(0.197)|
|Observations|2,372|2,367|1,760|1,757|1,757|1,757|1,757|1,757|
|R-squared|0.040|0.046|0.067|0.085|0.085|0.085|0.086|0.085|
|Number of ifscode|124|124|95|95|95|95|95|95|
|CountryFE<br>Robust standard errors c<br>*** p<0.01, ** p<0.05, *|Yes<br>lustered by<br>p<0.1|Yes<br>country in|Yes<br>parenthes|Yes<br>es|Yes|Yes|Yes|Yes|

- 79 -
Table 51

|Dependent variable: Fisc|al adjustme|nt when ne|eded based|on Lavign|e(2011)||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure minus|-0.003|-0.004*|-0.006*|-0.008*|-0.007|0.005|-0.004|-0.006|
|structural as % GDP|(0.002)|(0.002)|(0.004)|(0.004)|(0.004)|(0.010)|(0.008)|(0.004)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-0.042||-0.085|-0.058|-0.083|-0.104|-0.090|
|||(0.136)||(0.172)|(0.154)|(0.172)|(0.166)|(0.174)|
|Inflation (t-1)||-0.307||-0.434|-0.442|-0.431|-0.432|-0.432|
|||(0.216)||(0.272)|(0.278)|(0.273)|(0.273)|(0.273)|
|U.S. Interest rate||-0.003||-0.006|-0.006|-0.007|-0.006|-0.006|
|||(0.007)||(0.012)|(0.012)|(0.012)|(0.012)|(0.012)|
|**Political factors**|||||||||
|Gini|||0.000|-0.000|-0.000|0.002|-0.001|-0.000|
||||(0.001)|(0.001)|(0.001)|(0.002)|(0.001)|(0.001)|
|Rule of law|||-0.003|0.010|0.010|0.009|0.016|0.010|
||||(0.015)|(0.025)|(0.025)|(0.024)|(0.025)|(0.025)|
|Margin of Majority|||-0.057|-0.054|-0.058|-0.073|-0.050|-0.032|
||||(0.046)|(0.053)|(0.055)|(0.068)|(0.053)|(0.053)|
|Election's year|||-0.016|-0.021**|-0.021**|-0.022**|-0.021**|-0.021**|
||||(0.011)|(0.010)|(0.010)|(0.010)|(0.010)|(0.010)|
|**Interactions**|||||||||
|EMEs * Deviation|||||-0.003<br>(0.007)||||
|Gini * Deviation||||||-0.000<br>(0.000)|||
|Rule of law * Deviation|||||||-0.001<br>(0.002)||
|Majority * Deviation||||||||-0.004<br>(0.008)|
|Constant|0.053***|0.092**|0.127|0.178**|0.178**|0.133*|0.151*|0.168**|
||(0.016)|(0.041)|(0.082)|(0.087)|(0.088)|(0.070)|(0.090)|(0.081)|
|Observations|648|645|464|463|463|463|463|463|
|R-squared|0.004|0.018|0.013|0.043|0.044|0.046|0.044|0.043|
|Number of ifscode|84|83|62|61|61|61|61|61|
|CountryFE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Robust standard errors c<br>*** p<0.01, ** p<0.05, *|lustered by<br>p<0.1|country in|parenthese|s|||||

- 80 -
Appendix 9: Linear probability model with need under stressed conditions Table 52

|Dependent variable:|Need of fis|cal adjustm|ent based|on Escolano|et al.(201|4)|||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure|0.028***|0.022***|0.030***|0.022***|0.031***|0.013|0.007|0.024***|
|**Economic factors**<br>(% of GDP)|(0.005)|(0.005)|(0.006)|(0.005)|(0.010)|(0.017)|(0.008)|(0.008)|
|GDP growth (t-1)||-1.412***||-1.474***|-1.385***|-1.499***|-1.424***|-1.466***|
|||(0.275)||(0.276)|(0.265)|(0.278)|(0.276)|(0.273)|
|Inflation (t-1)||-0.122***||-0.144*|-0.145*|-0.144*|-0.146|-0.144*|
|||(0.035)||(0.085)|(0.086)|(0.085)|(0.090)|(0.086)|
|U.S. Interest rate||-0.043***<br>(0.012)||-0.058*** <br>(0.013)|-0.060*** <br>(0.014)|-0.057*** <br>(0.013)|-0.061***<br>(0.014)|-0.058***<br>(0.013)|
|**Political factors**|||||||||
|Gini|||-0.001|-0.002|-0.002|-0.007|-0.001|-0.001|
||||(0.006)|(0.005)|(0.005)|(0.011)|(0.005)|(0.005)|
|Rule of law|||0.013|0.068**|0.062**|0.070**|-0.020|0.068**|
||||(0.025)|(0.029)|(0.029)|(0.029)|(0.051)|(0.029)|
|Margin of Majority|||-0.054|-0.102|-0.108|-0.103|-0.107|-0.031|
||||(0.096)|(0.088)|(0.086)|(0.088)|(0.088)|(0.205)|
|Election's year|||0.000|0.002|0.003|0.001|0.002|0.001|
||||(0.015)|(0.015)|(0.015)|(0.015)|(0.015)|(0.015)|
|**Interactions**|||||||||
|EMEs * Rigidity|||||-0.014<br>(0.012)||||
|Gini * Rigidity||||||0.000<br>(0.000)|||
|Rule of law * Rigidity|||||||0.004*<br>(0.002)||
|Majority * Rigidity||||||||-0.004<br>(0.010)|
|Constant|-0.350***|0.026|-0.408|-0.064|-0.072|0.132|0.276|-0.107|
||(0.124)|(0.139)|(0.316)|(0.315)|(0.313)|(0.504)|(0.333)|(0.322)|
|Observations|1,825|1,772|1,597|1,555|1,555|1,555|1,555|1,555|
|R-squared|0.064|0.127|0.074|0.158|0.162|0.159|0.163|0.158|
|Number of ifscode|84|84|75|75|75|75|75|75|
|CountryFE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Robust standard erro|rs clustered|by countr|y in parent|heses|||||
|***p<0.01,**p<0.0|5,*p<0.1||||||||

- 81 -
Table 53

|Dependent variable: F|iscal adjus|tment when|needed b|ased on Esc|olano et al.|(2014)|||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure|0.002|-0.005|0.002|-0.005|0.005|0.016|-0.022**|-0.026**|
|(% of GDP)|(0.005)|(0.006)|(0.006)|(0.006)|(0.010)|(0.020)|(0.010)|(0.010)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-1.494***||-1.145**|-1.056**|-1.106**|-1.103**|-1.180**|
|||(0.482)||(0.488)|(0.468)|(0.495)|(0.474)|(0.518)|
|Inflation (t-1)||-0.186**||0.427|0.419|0.446|0.426|0.350|
|||(0.082)||(0.291)|(0.286)|(0.290)|(0.264)|(0.286)|
|U.S. Interest rate||-0.025||-0.053**|-0.054**|-0.056***|-0.056***|-0.056**|
|||(0.016)||(0.021)|(0.021)|(0.021)|(0.021)|(0.021)|
|**Political factors**|||||||||
|Gini|||0.008|0.008*|0.008*|0.022*|0.008*|0.007*|
||||(0.005)|(0.004)|(0.004)|(0.013)|(0.004)|(0.004)|
|Rule of law|||0.028|0.104**|0.093**|0.102**|-0.018|0.103**|
||||(0.037)|(0.044)|(0.046)|(0.043)|(0.098)|(0.043)|
|Margin of Majority|||-0.075|-0.001|0.009|0.019|-0.008|-0.918***|
||||(0.118)|(0.126)|(0.130)|(0.129)|(0.134)|(0.323)|
|Election's year|||-0.011|-0.017|-0.016|-0.018|-0.016|-0.012|
||||(0.031)|(0.031)|(0.031)|(0.031)|(0.032)|(0.031)|
|**Interactions**|||||||||
|EMEs * Rigidity|||||-0.018<br>(0.011)||||
|Gini * Rigidity||||||-0.001<br>(0.000)|||
|Rule of law * Rigidity|||||||0.004<br>(0.003)||
|Majority * Rigidity||||||||0.038***<br>(0.014)|
|Constant|0.122|0.470**|-0.237|-0.188|-0.170|-0.739|0.281|0.364|
||(0.142)|(0.189)|(0.388)|(0.312)|(0.309)|(0.578)|(0.416)|(0.354)|
|Observations|638|624|558|546|546|546|546|546|
|R-squared|0.000|0.032|0.006|0.046|0.052|0.049|0.052|0.056|
|Number of ifscode|68|68|61|61|61|61|61|61|
|CountryFE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Robust standard error<br>***p<0.01,**p<0.05|s clustere<br>,*p<0.1|d by country|in parenth|eses|||||

- 82 -
Table 54

|Dependent variable: Nee|d of fiscal|adjustment|based on E|scolano et|al.(2014)||||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure minus|0.031***|0.026***|0.034***|0.026***|0.029**|0.015|-0.002|0.024**|
|structural as % GDP|(0.006)|(0.006)|(0.006)|(0.006)|(0.012)|(0.024)|(0.014)|(0.011)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-1.425***||-1.533***|-1.503***|-1.560***|-1.458***|-1.535***|
|||(0.260)||(0.273)|(0.264)|(0.276)|(0.271)|(0.271)|
|Inflation (t-1)||-0.102**||-0.111|-0.115|-0.107|-0.126|-0.111|
|||(0.048)||(0.084)|(0.085)|(0.081)|(0.089)|(0.084)|
|U.S. Interest rate||-0.047***||-0.064***|-0.064***|-0.063***|-0.067***|-0.064***|
|||(0.013)||(0.014)|(0.015)|(0.014)|(0.015)|(0.014)|
|**Political factors**|||||||||
|Gini|||-0.001|-0.001|-0.001|-0.003|-0.001|-0.001|
||||(0.007)|(0.006)|(0.006)|(0.008)|(0.006)|(0.006)|
|Rule of law|||0.008|0.066**|0.065**|0.068**|0.012|0.066**|
||||(0.024)|(0.029)|(0.029)|(0.029)|(0.040)|(0.029)|
|Margin of Majority|||-0.092|-0.142|-0.140|-0.142|-0.141|-0.173|
||||(0.098)|(0.086)|(0.086)|(0.087)|(0.086)|(0.138)|
|Election's year|||0.002|0.003|0.004|0.003|0.005|0.004|
||||(0.016)|(0.015)|(0.015)|(0.015)|(0.015)|(0.015)|
|**Interactions**|||||-||||
|EMEs * Deviation|||||-0.005<br>(0.014)||||
|Gini * Deviation||||||0.000<br>(0.001)|||
|Rule of law * Deviation|||||||0.007*<br>(0.003)||
|Majority * Deviation||||||||0.005<br>(0.017)|
|Constant|0.079|0.369***|0.090|0.294|0.298|0.370|0.517|0.313|
||(0.051)|(0.071)|(0.313)|(0.301)|(0.299)|(0.359)|(0.320)|(0.307)|
|Observations|1,753|1,707|1,538|1,502|1,502|1,502|1,502|1,502|
|R-squared|0.059|0.130|0.071|0.166|0.166|0.166|0.172|0.166|
|Number of ifscode|83|83|74|74|74|74|74|74|
|CountryFE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Robust standard errors c<br>***p<0.01,**p<0.05,*|lustered by<br> p<0.1|country in|parenthese|s|||||

- 83 -
Table 55

|Dependent variable: Fisc|al adjustm|ent when ne|eded based|on Escola|no et al.(2|014)|||
|---|---|---|---|---|---|---|---|---|
|Variables|(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|
|Rigid expenditure minus<br>structural as % GDP|-0.005<br>(0.005)|-0.013**<br>(0.005)|-0.005<br>(0.006)|-0.011**<br>(0.005)|-0.001<br>(0.010)|0.018<br>(0.026)|-0.027**<br>(0.013)|-0.029**<br>(0.013)|
|**Economic factors**|||||||||
|GDP growth (t-1)||-1.530***||-1.204**|-1.100**|-1.166**|-1.167**|-1.185**|
|||(0.489)||(0.490)|(0.483)|(0.491)|(0.485)|(0.506)|
|Inflation (t-1)||-0.190**||0.455|0.434|0.465|0.460|0.396|
|||(0.083)||(0.298)|(0.299)|(0.294)|(0.291)|(0.307)|
|U.S. Interest rate||-0.031*||-0.055**|-0.055***|-0.058***|-0.058***|-0.056***|
|||(0.015)||(0.021)|(0.020)|(0.020)|(0.020)|(0.021)|
|**Political factors**|||||||||
|Gini|||0.006|0.007|0.006|0.013*|0.006|0.006|
||||(0.005)|(0.004)|(0.004)|(0.007)|(0.004)|(0.004)|
|Rule of law|||0.021|0.104**|0.095**|0.101**|0.066|0.104**|
||||(0.039)|(0.046)|(0.047)|(0.045)|(0.064)|(0.045)|
|Margin of Majority|||-0.067|0.009|0.032|0.032|0.025|-0.313|
||||(0.120)|(0.126)|(0.131)|(0.131)|(0.130)|(0.233)|
|Election's year|||-0.014|-0.020|-0.019|-0.019|-0.020|-0.018|
||||(0.032)|(0.032)|(0.031)|(0.031)|(0.032)|(0.032)|
|**Interactions**|||||||||
|emes = o,|||||-||||
|EMEs * Deviation|||||-0.017||||
||||||(0.011)||||
|Gini * Deviation||||||-0.001<br>(0.001)|||
|Rule of law * Deviation|||||||0.004<br>(0.004)||
|Majority * Deviation||||||||0.034*<br>(0.020)|
|Constant|0.238***|0.485***|-0.053|-0.159|-0.129|-0.377|-0.004|0.046|
||(0.051)|(0.094)|(0.323)|(0.255)|(0.261)|(0.330)|(0.313)|(0.291)|
|Observations|619|607|541|531|531|531|531|531|
|R-squared|0.002|0.041|0.007|0.054|0.059|0.058|0.057|0.058|
|Number of ifscode|67|67|60|60|60|60|60|60|
|CountryFE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Robust standard errors c|lustered by|country in|parenthese|s|||||
|***p<0.01,**p<0.05,*|p<0.1||||||||

- 84 -