FISCAL CONSOLIDATION AND DECENTRALISATION: A TALE OF TWO TIERS

attempts, as classified using definition 2 above. Of a total of 61 attempted consolidations, 22
(36%) are classified as successful; 27 general government consolidation attempts involve
consolidation at the sub-central tier, of which 12 (44%) are judged successful. There are
several sustained periods of consolidation (including the UK 1996-1998, Ireland 1987-1989
and Sweden 1981-1984) and it is noticeable that successful consolidations tend to occur close
to, i.e. within a two to three year period of, other attempted consolidations.

Using our more refined success index, 22 general government consolidation attempts achieved
the toughest criterion of a fall in the debt to GDP ratio that exceeded 5 percentage points (SI =
3); 12 resulted in a stable debt to GDP ratio or a decline of less than 5 percentage points (SI =
2); 17 attempts resulted in a reduction in the growth rate of the debt to GDP ratio, so satisfied
our weakest definition of success (SI = 1) and the remaining 10 of the 61 consolidation
attempts fell in the failed category (SI = 0).

Alesina and Perotti [1995] suggested that where a relatively large number of consolidation
attempts in a given country end in failure this may be the result of ill-judged ‘stop-go’ policies.
To explore this hypothesis we have recorded the number of discretionary fiscal expansions
undertaken by each country in the final row of Table 2.

Table 2: Consolidation attempts, success rates and discretionary expansions¹²

A relatively large number of both consolidation attempts and discretionary expansions took
place in a number of countries including Denmark, the UK, Ireland, Finland and Norway.
However, these countries are not uniformly associated with low rates of success rates of
consolidation attempts: Denmark and the UK record relatively high success rates; but
conversely Finland and Norway combine a relatively large number of both consolidation
attempts and discretionary expansions took place in a number of countries including Denmark,

¹² We identified discretionary fiscal expansions in a symmetric manner to consolidations. That is, a discretionary
expansion was deemed to have occurred if the fiscal impulse was at least 1.5% of GDP.

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