Why are corrupt countries less successful in consolidating their budgets?

Following the financial crisis, many countries introduced fiscal stimulus packages making budget consolidations in the future rather challenging. Using a data set for 28 OECD countries spanning the period 1978–2007, we contribute to the literature on success probabilities of consolidation attempts by exploring the impact of corruption, and in particular the interplay of corruption and the choice of the policy instrument. We find that corruption significantly reduces the success rate. When controlling for the change in government expenditures, however, the impact of corruption is insignificant or at least becomes less pronounced. We therefore relate the choice of the fiscal instrument to corruption and find that corrupt countries rely significantly less on expenditure cuts during periods of consolidation attempts. We conclude that international organizations should be careful in observing what corrupt countries do when trying to consolidate their budgets.

Research Highlights
► We analyze the impact of corruption during budget consolidations in OECD countries.
► Corrupt countries' attempts to consolidate their budgets are less often successful.
► Controlling for the change in government expenditure makes this impact insignificant.
► Corrupt countries rely less on expenditure cuts during consolidation attempts.
► Corrupt countries are less successful because they choose the wrong policy instrument.