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The role of spending rigidity in fiscal adjustment
Public debt is at or near record highs in many economies. This column argues that the composition and flexibility of government spending are as important as its size. Using cross-country data, it shows that higher spending rigidity (captured by the wage bill) reduces the sensitivity of cyclically adjusted primary balances to higher debt and reduces the likelihood of entering a consolidation episode. Instead, higher rigidity is associated with larger cuts to public investment. To improve flexibility, it suggests governments should strengthen payroll management, integrate staffing plans into medium-term fiscal frameworks, and make hiring and remuneration policies more transparent. […]