Over the next decades, many OECD countries are anticipating large increases in public spending as a
result of population ageing and other long-term structural trends. The need to put public finances on a
sustainable footing is widely recognised, but progress has been uneven and slow. Some policy makers may
feel that action can be deferred for a few years at little cost because of the long-term nature of the problem.
This paper questions this perception by proposing a model of the political costs of consolidating public
finances. The main finding is that even a short delay increases political cost of consolidation quite
markedly when ultimately policy makers are facing a deadline by which sustainability must be restored.
The conclusion is very robust to changes in assumptions and specification. A variant of the model shows
that with an infinite horizon the incentive to consolidate is weaker, which highlights the importance of
setting a deadline.
This paper relates to the 2007 Economic Survey of the Euro area (www.oecd.org/eco/surveys/euroarea).
The Political Economy of Delaying Fiscal Consolidation
Working paper
OECD Economics Department Working Papers
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