Paradox of Austerity: Multi-Country Evidence

Abstract

ABSTRACT This article seeks to explore whether a reduction in the government expenditure would necessarily reduce the fiscal deficit to GDP ratio or not. It has been theoretically argued that this would really depend upon the values of the government expenditure elasticity and that of the revenue buoyancy of the economies, which are, in turn, dependent upon various institutional and historical factors of the respective economies. Based on available empirical evidence from 175 countries for 15 years (from 2000 to 2014), the authors argue that a cut in the government expenditure might paradoxically lead to a higher fiscal deficit to GDP ratio for about half of the countries around the globe. This study tries to argue that an improvement in the value of fiscal multiplier and that in the tax buoyancy can be the policy alternatives to various painful austerity measures.