Improvements in revenue collection and fiscal prudence were two channels through which political transformations reduced sovereign credit risk. Both fiscal centralization and limited government generally led to increases in government revenues and reductions in deficit ratios. To complete the analogy described at the start of Chapter 4, if long-term sovereign bond yields represent the heartbeat of a nation’s fiscal health, then revenues and fiscal prudence represent elements of pulmonary circulation like the lungs and blood vessels that underlie its strength.

To fully characterize the fiscal effects of political transformations, the data are now subjected to a battery of rigorous tests. The statistical analysis begins with structural breaks tests, which assume no a priori knowledge of major turning points in the fiscal series, but let the data speak for themselves. So long as these tests identify fiscal centralization and limited government as key breaks, we can have even greater confidence that political transformations improved public finances. In this chapter the breaks setup is first described. Then the results of the breaks tests for sovereign credit risk are reported, followed by those for government revenues and fiscal prudence.