Drivers of public debt reductions

We analyse 34 debt reduction episodes since the late 1970s in OECD countries, focussing on the contribution from the change (often an increase) in the primary balance. This change is decomposed into three components (cyclical, discretionary and one-off) as well as into a detailed set of budget items on both revenue and expenditure sides, using an updated version of the OECD Public Finance Dataset. Favourable cyclical conditions have been the main driver of declining debt-to-GDP ratios, both through denominator effects and through an improvement in primary balances. Discretionary fiscal consolidation efforts, mostly on the expenditure side, have been a more modest driver of debt reduction during the episodes themselves, but have taken place on a larger scale in the run-up to the episodes. During debt reduction episodes, overall expenditure restraint appears to have been accompanied by growth-friendly shifts in the composition of public spending, mainly to the benefit of human capital formation. This reflects broader trends, such as the generalised increase in health expenditure, but also containment of spending on pensions and subsidies. On the revenue side, corporate income taxes have made the largest contribution to the improvement in primary balances.