Discussion Paper Details

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Title: Sticky Spending, Sequestration, and Government Debt

Author(s): Facundo Piguillem and Alessandro Riboni

Publication Date: June 2021

Keyword(s): Budgetary Inertia, Delayed Stabilization, Entitlement Spending Reform, Government Debt and Mandatory and Discretionary Spending

Programme Area(s): Public Economics

Abstract: Once established, government spending programs tend to continue. Spending inertia can lead to unsustainable debt levels that require fiscal stabilization, such as "sequestration." We develop a political economy model of debt with sticky spending by assuming that the government must maintain a fraction of past spending. We show that inertia insures against the risk of political turnover, which may reduce politicians' incentives to accumulate debt. However, if preexisting commitments are large, as in the current U.S. context, inertia exacerbates incentives to increase debt; faced with the prospect of stabilization, the government overspends to "dilute" the spending commitments of past administrations.

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Bibliographic Reference

Piguillem, F and Riboni, A. 2021. 'Sticky Spending, Sequestration, and Government Debt'. London, Centre for Economic Policy Research.