& Blackwell Publishers Ltd 2000. Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden MA 02148, USA. 83 WHAT IS VULNERABLE DURING FISCAL RETRENCHMENT? MOHSEN FARDMANESH { AND NADER HABIBI Using data for 70 countries in the 1980s, this study investigates the impact of socioeconomic and political characteristics of a country on the vulnerability of expenditure categories during budget cuts. Greater democracy is associated with less vulnerability of the social and productive sectors and with more vulnerability of the administrative/defense, infrastructure, and miscellaneous sectors. Political instability reduces the vulnerability of the social, administrative/defense, and miscellaneous sectors and increases that of the productive sector. Fiscal federalism increases the vulnerability of the infrastructure and administrative/defense sectors and reduces that of the productive sector. The relative size of the budget cuts is also a determining factor. 1. INTRODUCTION FISCAL ADJUSTMENT programs often require a reduction in real total govern- ment expenditures. Allocating budget reductions among various expenditure categories is a delicate task. Empirical investigations by Hicks and Kubisch (1983) and Hicks (1991) document that budget reduction policies are selective, with some sectors being more vulnerable than others. These studies have also documented signi®cant international dierences in the vulnerability of each expenditure category. However, while arguing the importance of vulnerability indicators in ®scal analysis, Hicks and Kubisch do not study their determinants and are empirically limited to the tabulation and descriptive statistics of these indicators. Our study advances this literature by determining how the political, economic and social conditions in a country in¯uence the vulnerability of each expenditure category using regression analysis. In order to derive our regression models, which include a wide range of institutional parameters, we utilize a theoretical public choice framework in which the political leadership of a country maximizes its own dichotomous (sel®sh vs. altruistic) utility by choosing the internal composition of a given total budget. Studying the vulnerability of government expenditure programs is important for several reasons. First, the successful implementation of a ®scal adjust- ment program requiring a deep budget cut depends on how the burden of the budget reduction is distributed among various categories. Second, the welfare ECONOMICS AND POLITICS 0954-1985 Volume 12 March 2000 No. 1 { Corresponding author. Department of Economics (004-00), Temple University, Philadelphia, PA 19122, USA.