Fiscal Consolidation Policies in the Context of Italy's Two Recessions

Topic . The article discusses the policy of progressive fiscal consolidation carried out in developed countries and in Russia. There is also a characteristic of fiscal policy in Russia. Purpose. We aim to identify the actual effects of the policy of financial consolidation in terms of a tight dependence on the cyclical development of the world economy. Methodology. We used the methodology of macroeconomic analysis, systemic approach, statistical methods (cluster analysis), and methods of mathematical statistics and econometrics. Results . The rising debt of the developed countries in conditions of chronic budget deficit actualized the task of fiscal consolidation. Initially, the idea of fiscal consolidation was to implement a progressive consolidation, i. e. the reduction of budget expenditures, which would contribute to the formation of the financial potential. In turn, the financial potential is realized in the form of a budget surplus that could be used to reduce the tax burden and rise of spending in the future. Literature indicates on the effect of reproduction of the austerity measures due to changes in budget institutions; it limits the ability to stimulate the economy through measures of fiscal policy. Thus, the approach to the implementation of fiscal policy is offset, in the direction of tightening. The analysis of fiscal policy in Russia since the late 1990s does not allow concluding that its character corresponds to the ideas of progressive fiscal consolidation. Despite the creation of a significant budget surplus in times of boom, it practically was not used for the task of stimulating economic development. Conclusions . The policy of fiscal consolidation, ongoing in Russia, primarily aimed at solving a narrow range of budget issues and is not intended for the future to stimulate the economy.

We build a dynamic general equilibrium model with heterogeneous households and capital-skill complementarity in the production function to study aggregate and distributional effects of fiscal consolidation policies when government uses a rich set of productivity-enhancing spending instruments along with utility-enhancing spending and tax fiscal instruments. Fiscal policy is conducted through simple fiscal rules. We study both ad-hoc and optimized fiscal rules. Our main results indicate that ad-hoc fiscal consolidation policies, either through spending cuts or tax increases, are recessionary and entail an equity-efficiency trade-off in the short- and medium-run. That is spending-based consolidation policies are less recessionary but come at a higher distributional cost; whereas tax-based consolidation policies result in sharper output losses but have smoother distributional effects. In addition, fiscal consolidation policies through optimized fiscal rules can be expansionary and social welfare enhancing while at the same time balance the equity-efficiency trade-off.

Macroeconomic Policy Beyond Brexit

This chapter analyses the evolution of public spending for culture, in front of institutional changes, specifically decentralization processes, and fiscal consolidation policies, taking Italy over the period 1996–2012 as a case study. The case of Italy is representative of the top-down, state-driven model of public support to culture, even if increased autonomy has been attributed to local subjects in recent times. We pay attention to the role of different government layers and to differences across regions, with a focus on what happened during the years of the so-called ‘Great Recession’ (2008–12). Particular aspects of spending for culture, as compared to the whole of public spending, do emerge, as well as the link with the dynamics of aggregate income.

The ‘Great Recession’ was the worst macroeconomic downturn since the 1930s in most OECD countries. In many economies, subsequent recovery has been sluggish, and has sometimes turned into a new recession. The paper in vestigates the effects of the Great Recession on the distribution of household incomes. It shows that the changes between 2007 and 2009 in household incomes in total and on avera ge, in income inequality, and in poverty rates, were modest in most of the countries studied , in spite of the depth of the recession in most countries. This outcome is remarkably differen t from the far more dramatic experience of the Great Depression, although not so different from some recent recessions such as the Nordic crisis of the early 1990s. During the GR, th e household sector was protected from the impact of the downturn by both automatic stabiliser s and additional support of governments through the tax and benefit system. The post-2009 d istributional impacts of the GR are likely to have been considerably larger however, with grea ter differences across countries emerging.

Current account adjustments in OECD countries revisited: The role of the fiscal stance

The severe economic crisis that has been affecting Greece since 2009 is having an unprecedented impact in terms of job and income losses, and is widely perceived to have a comparably significant effect in terms of greater inequality and increased poverty. This article provides an early assessment of whether (and to what extent) the latter is the case. Specifically, it simulates the impact of the austerity (i.e. fiscal consolidation policies) and the recession (i.e. negative developments in the wider economy) on the distribution of incomes in 2009–12, and estimates how the burden of the Great Recession has been shared across income groups. The article concludes by discussing the policy implications of the authors’ research.

The paper studies the fiscal policies implemented in the European Union countries since the beginning of the current crisis. With this aim in mind we have analyzed separately the expansionary fiscal policies implemented at the first stage of the crisis and the fiscal consolidation policies that became widespread at the beginning of the current decade. Studying the content of the national fiscal policies (discretionary measures versus built-in stabilizers, revenue-based versus expenditure-based fiscal policies, the relationship existing between the size of the fiscal impulses-adjustments and the composition of these measures) shows the significant differences between the fiscal policies implemented in the European Union countries.

The topic of rising income inequality does not only gain in relevance since the two prominent reports by the OECD (Growing unequal? Income Distribution and Poverty in OECD Countries, Paris 2008; Divided we stand—Why inequality keeps rising, Paris 2011) but rather since the financial crisis. So far there is only scarce empirical evidence–besides a rather broad literature dealing with the US–about the consequences of the financial crisis on income inequality in Europe (e.g. Jenkins et al. in The Great Recession and the distribution of household income, Oxford University Press, Oxford 2013) and more important about wealth inequality (Lundberg and Waldenström in Paper presented at the 4. SEEK conference, Mannheim 2014). In this paper we focus on the short-term distributional effects in Germany, as this country was one of the OECD countries which had been hit hardest—as measured by a decline in GDP—by the Great Recession in 2008/2009. The underlying data source comes from the German Socio Economic Panel which is a representative longitudinal survey of private households in Germany. This survey provides consistent yearly information about incomes since 1984 and for wealth in at least three survey years. Thus, we are able to identify any potential effects of the financial crisis on incomes (e.g. earnings, market income, post-government income) and wealth components (e.g. property, business assets, financial assets, net worth) and their respective inequality in Germany. Our main finding is that we do not find any significant distributional changes during the Great Recession. However, the Great Recession temporary froze the income structure while afterwards income mobility tries to make up leeway. Findings of a factor decomposition showed as expected that the relative contribution of capital income to overall inequality lost in relevance during the Great recession. Several factors attenuated the impact of the Great Recession and will be discussed in detail.

The fiscal consolidation program in 2015 was a success. Despite this success, it is time to consider a switch away from the fiscal consolidation policy towards a fiscal optimization policy. By 'fiscal optimization policy' we mean a proper design of fiscal instruments that might lead towards the maximum potential rate of GDP growth. Relying on a panel regression model for 76 countries, the IMF recommended some guidelines for such an optimal fiscal policy in its latest regional report on Central, Eastern, and Southeastern European (CESEE) countries. In this paper we test the IMF's recommendations in a different analytical framework based on the QUEST_Serbia Dynamic Stochastic General Equilibrium (DSGE) model. We endogenize all fiscal revenue instruments, update macroeconomic data, and estimate the model's coefficients using Bayesian technique. We also develop a new analytical tool for the decomposition of Impulse Response Functions (IRF), which helps us to reduce complex dynamic non-linear general equilibrium relations to simpler linearized relations between endogenous variables and key state variables. Our findings support a general IMF suggestion in the particular case of the Serbian economy for reducing fiscal duties on labor and capital inputs, as well as public consumption and transfer payments. We, however, do not support increasing VAT rates or expanding public investments unless some additional conditions are met.

Economic RecordVolume 90, Issue 288 p. 132-133 Review The Great Recession and the Distribution of Household Income, by Jenkins, Stephen P., Brandolini, Andrea, Mickelwright, John, and Nolan, Brian ( Oxford University Press, Oxford, UK, 2013), pp. 277. Eva Sierminska, Eva Sierminska CEPS/INSTEAD Research InstituteSearch for more papers by this author Eva Sierminska, Eva Sierminska CEPS/INSTEAD Research InstituteSearch for more papers by this author First published: 05 March 2014 https://doi.org/10.1111/1475-4932.12106Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat No abstract is available for this article. Volume90, Issue288March 2014Pages 132-133 RelatedInformation

Italy’s policy of fiscal consolidation and growth-friendly structural reforms has substantially improved its economic prospects, but the adverse sentiment that the country has faced in the sovereign bond market over the past years has deep roots. It reflects lingering anxieties over the euro area’s future, as well as persistent economic and financial difficulties, in particular the high level of public debt and low potential growth. The government has rightly aimed to halt the rise in the public debt-to-GDP ratio and put it on a downward path. This could be achieved either with a balanced government budget or a small fiscal surplus. While additional fiscal tightening would have transitory negative effects on output, it would be rewarded by faster debt reduction and lower risk of renewed financial-market reactions. In addition, automatic stabilisers should be allowed to work.Concerns about fiscal sustainability and the prolonged recession have spilled over to the financial sector. Lending conditions are tight, non-performing loans are high and rising, and capital flowed out of Italy to the core countries of the euro area. The Bank of Italy should continue to ensure that banks increase provisions against losses, and strengthen their capital asset position by raising new equity from private sources, including from foreign stakeholders, by retaining earnings, and by disposing of non-core assets. Resolution of the fiscal, economic and financial crisis in Italy depends in part on action at the euro area level. As a member of the euro area, Italy has benefited from the establishment of the European Stability Mechanism, the announcement by the European Central Bank of the Outright Monetary Transactions scheme and the plans for a euro-area banking union.

Recent theoretical studies have highlighted that both the level of public debt and the unit cost of servicing the debt (r-g) play a role in the sustainability of public finances. This paper builds on this literature and introduces a new approach to analysing the relationship between economic downturns and sovereign debt risks by considering the total public debt burden, that is, the interaction between the level of debt and r-g. We conduct this analysis for 18 advanced economies over a span of 150 years, uncovering three novel findings. First, we document that the level of public debt and the interest-growth differential convey distinct information about public finances conditions, reinforcing the argument for incorporating both measures in the assessment of sovereign debt sustainability risks. Second, we offer a long-term historical perspective on the role of the total public debt burden in shaping the severity of recessions and the pace of subsequent recoveries. Our findings demonstrate that a high public debt burden is associated with deeper economic contractions, sharper declines in investment, deflationary pressures and pronounced credit contractions during recessions. Further analysis of plausible transmission mechanisms suggests that an elevated total debt burden at the onset of recessions is linked to more limited accommodative policies during financial crises. Third, we document the feedback effects of financial crises on the components of the total public debt burden, demonstrating that both the level and cost of public debt systematically deteriorate, thereby heightening the risk of sovereign debt crises in the aftermath of financial turmoil.

This paper examines the impact of austerity measures on public sector employment, with a particular focus on the period following the 2008 global financial crisis. Drawing on empirical data from the European Union, the United States, and selected emerging economies, we analyze how fiscal consolidation policies have reshaped public sector labor markets. Through descriptive statistics, econometric analysis, and case study approaches, the paper identifies the primary mechanisms through which austerity affects employment and evaluates the long-term implications for public administration and service delivery. This research builds upon prior academic work by Ramil Abbasov on government budgeting, fiscal sustainability, and performance-based public finance reforms. The discussion is intended to contribute to a better understanding of how fiscal policy can be balanced with the need to maintain efficient and equitable public services.

Зв'язок між потоками капіталу і сальдо бюджету становить важливий елемент дослідження фіскальної політики країн інтеграційного утворення, включно з особливостями взаємодії його найбільших країн та країн умовної "периферії". Насамперед доречно порівняти залежність від потоків капіталу та обмежень платіжного балансу країн Центрально-Східної Європи і Балтії, оскільки ці країни відрізняються за рівнем доходу, особливостями політики обмінного курсу та підходами до євроінтеграційного процесу. Припускається, що з підвищенням ступеня економічної інтеграції підсилюється залежність від потоків капіталу та обмежень платіжного балансу, що порівняно самостійно впливає на проведення фіскальної політики. Водночас поглиблення інтеграції призводить до уніфікації найбільш загальних параметрів фіскальної політики, як сальдо бюджету та рівень державного боргу, що полегшує гармонізацію фіскальної політики на рівні інтеграційного утворення. На підставі річних даних 1990-2018 рр. проаналізовано залежність сальдо бюджету країн Центральної і Східної Європи, Південної Європи і Балтії від припливу капіталу і ставки LIBOR (англ. London Interbank Offer Rate). Показано, що залучення іноземного капіталу призводить до погіршення сальдо бюджету країн європейської "периферії", але вплив зникає з урахуванням циклу ділової активності, що засвідчує проциклічність потоків капіталу. Для нейтралізації надмірного припливу-відпливу капіталу, що так чи інакше впливатиме на фіскальні показники, необхідні заходи координації фіскальної політики на обох рівнях – національному і наднаціональному.