DP16294 Sticky Spending, Sequestration, and Government Debt
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.