Government Spending and Budget Deficits in the Industrial Countries

Fiscal policy Nouriel Roubini and Jeffrey Sachs This paper examines the evolution of the size of government and of budget deficits in OECD economies. We highlight the rapid increase in government spending in the 1970s, the sharp rise in budget deficits and public debt after 1973, and the reversal in these trends in the 1980s. The increase in the size of government was associated in part with the slowdown in growth after 1973, but also reflected gradual adjustment of the ratio of spending to output towards a long-run target which depends on political and institutional characteristics of the economy – the political orientation of the government, the degree of wage indexation, and the degree of stability of the political system. Such factors also explain the size of budget deficits. When faced with an adverse shock, subsequent deficit reduction requires a measure of political consensus. We note that such consensus is hard to achieve in multi-party coalitions. In consequence, countries with such a political structure tended In consequence, countries with such a political structure tended toIn consequence, countries with such a political structure tended to experience much more rapid increases in their debt-GNP ratios.