Budget balances in OECD countries: what makes them change?

Fiscal balances have deteriorated quickly in recent years, bringing back to the foreground the question what factors explain such sharp changes. This paper takes a broad perspective at the issue regarding countries included, the range of potential explanatory variables, and the time-span covered. The empirical analysis shows that changes in budget balances are affected by debt growth, macroeconomic developments and political factors. In particular, we find that the run-up to EMU induced additional consolidation in Europe and that budget balances deteriorate markedly in election years. Asset prices also affect budgets, but the impact remains limited in normal times.