The role of spending rigidity in fiscal adjustment by Luiz de Mello, Joao Tovar Jalles published by VOXEU (3/2026).
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.