Table 4 reports average changes in total expenditure and revenue achieved during successful
and failed consolidation attempts respectively17.
We again begin by confirming the findings in the literature based on general government data
(e.g. Alesina and Perotti [1995] and Von Hagen et al. [2001]) in that successful consolidation
attempts are associated with large general government expenditure cuts, in excess of 1.7% of
GDP on average. In contrast, failed attempts are associated with significantly smaller cuts in
expenditure and somewhat larger revenue hikes (though note that the difference in revenue
hikes across successful and failed attempts is not statistically significant).
A new result revealed in Table 4 is that successful consolidation attempts are associated with
substantial expenditure cuts by both the central and sub-central tiers of government. In failed
consolidation attempts the expenditure cuts achieved across all tiers of government are
significantly smaller, and the lower portion of the table reveals that in the least successful
category, SI=0, expenditure of both tiers actually rises. The lower panel of Table 4 shows
that the largest increases in revenue are recorded for both tiers when SI=0 i.e. in the least
successful consolidation attempts. The average increase in revenues collected by the central
tier when SI=0 is more than twice that achieved in the most successful consolidation attempts,
i.e. when SI=3, while for sub-central tiers the adjustment to revenues is more than three times
larger.
Overall, these results offer clear support to the hypothesis that the composition of a
consolidation attempt is critical to its probability of success. At each tier of government, the
average cuts in expenditure associated with consolidation attempts fall in size as we reduce
the stringency of the requirement for success; the reverse pattern is observed across revenue
changes, whereby the greater success accords with less reliance on increases in revenue, and
less reliance on adjustment at the sub-central level.
The above analysis has shown that all tiers of government, central and sub-central, are
actively engaged in most consolidation attempts. However, it does not allow us to disentangle
which level of government takes the relative brunt of the expenditure or revenue adjustment.
To examine this question, we have calculated the percentage share of general government
expenditure and revenues conducted or received by the respective tiers both prior to and
following each consolidation attempt. Overall, the average shares of general government
17 Total expenditure is defined as primary expenditure less transfers (grants) paid from one tier of government to
another. The focus on primary spending ensures that interest payments on outstanding debt are excluded from the
analysis, since governments have little discretion over these in the short term. Transfers from the central tier of
government to sub-central tiers will be recorded when they are spent at the sub-central level, so to include this as
an element of central government spending would result in double counting.
Total Revenue includes tax revenue, non-tax revenues (from fees and user charges) but excludes grants received
from other levels of national government (though grants received from outside government, e.g. the EU, are
included).
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