Economics, Politics and Fiscal Policy

Any analysis of the use that governments make of fiscal policies would lack clarity if it were not understood in the broader context of economic policymaking. One cannot start discussing the variation of fiscal policy and fiscal adjustment strategies along time and among different European countries, without first outlining the main characteristics of this macroeconomic tool. The purpose of this chapter is to provide the reader with the general framework in which fiscal policies in general, and fiscal adjustments in particular, have to be understood. In the first section, fiscal policy will be placed in the broader context of macroeconomic policy as one of the most important policy instruments available to governments that want to intervene in the economy. The second section, once the nature of fiscal policies has been understood, will present empirical evidence on the strong variation of fiscal outcomes during the last forty years in the European Union. Once the macroeconomics of fiscal policy have been understood, and after a first consideration of the history of fiscal policies has been presented, I will then elaborate on different hypotheses that could explain the observed variability in fiscal policy outcomes, and strategies of fiscal adjustment. Section three of this chapter will present economic determinants of fiscal policies, section four will discuss the political factors and section five will group them in five hypotheses within a circular theoretical framework. Finally, the conclusion will summarize the main arguments of the chapter.