Impact Of Fiscal Consolidation Research Articles

Impact of fiscal consolidation in different states of domestic government debt in South Africa 1979 to 2022

Impact of fiscal consolidation in different states of domestic government debt in South Africa 1979 to 2022

Impact of fiscal consolidation on economic growth: the Tunisian case

PurposeDeparting from the expansionary austerity literature, this study aims at examining how fiscal consolidation affects the economic growth in Tunisia using annual data over the period 1970–2018.Design/methodology/approachTo revisit the fiscal consolidation-economic growth nexus, the ambiguous empirical findings in previous literature make useful the adoption of alternative econometric techniques. The authors use an extended nonlinear autoregressive distributed lag (ARDL) cointegration approach developed by Shin et al. (2014) and the Diks and Panchenko's (2006) nonlinear Granger causality test. Furthermore, a traditional approach based on changes in cyclically-adjusted primary balance was applied to define the fiscal consolidation episodes in Tunisia.FindingsThe empirical evidence reveal that fiscal adjustment in Tunisia may hurt the economy, both in the short- and long-run, through its contractionary effect on economic growth. Another important finding concerns the unidirectional nonlinear Granger causality running from fiscal consolidation to economic growth.Practical implicationsFiscal adjustment in Tunisia is found to play a prominent role in reducing public debt; but at the same time, it may be costly and not beneficial to the economy. This view corroborates with the fact that fiscal consolidation is more likely to end successfully only under specific conditions. This calls for a deeper reflection upon new insights regarding the design of fiscal adjustment in Tunisia. To reach this end, it is suggested to combine the defensive consolidation strategy with offensive components such as investment, infrastructure, education and health.Originality/valueThe existing economic analysis on fiscal policy-growth nexus in Tunisia has often identified fiscal consolidation through the use of the actual fiscal balance. With the goal of more accurate estimation, this study bridges the gap by using the cyclically-adjusted primary balance (CAPB) as a much suitable indicator to investigate the non-Keynesian effect of fiscal consolidation in Tunisia. This indicator eliminates the influence of cyclical fluctuations and many other fixed expenditures such as the interest paid on the public debt.

INTERDEPENDENCE OF FISCAL CONSOLIDATION AND ECONOMIC GROWTH IN EU COUNTRIES WITH DIFFERENT LEVELS OF DEVELOPMENT

The concept of fiscal consolidation is most often mentioned during major economic crises, which are usually the result of economic shocks caused by crises such as the one in 2008, but also the last crisis caused by the COVID-19 pandemic. In such circumstances, as a rule, high deficit and/or enormous growth of public debt occur. Therefore, many countries need to consolidate fiscally their public finances. In this paper, the focus of the analysis is on the impact of fiscal consolidation on the economic growth of the European Union with different levels of development. It is assumed that countries with low incomes and less developed economies have a special obligation and a need for stable public finances. The same refers to the small and open economies that are largely exposed to the stability/instability of the surrounding countries. Therefore, it is very important that countries with a low level of development pay special attention to the fiscal stability of the country’s public finances.

The impact of fiscal consolidations on growth in sub-Saharan Africa

This paper examines the output effects of changes in public expenditure and revenue in sub-Saharan African countries during 1990–2016. Fiscal multipliers in sub-Saharan Africa are somewhat smaller than those estimated in the literature for advanced and emerging economies. The effect of changes in fiscal policy on output depends on the composition: Cutting public investment has a larger effect on output than cutting public consumption or raising revenue. Episodes of fiscal consolidation have short- and medium-term output effects, but here, too, composition matters: Fiscal consolidations based on reducing public investment have the largest effect on output, while fiscal consolidations based on revenue mobilization are less harmful. These findings suggest that the negative impact on growth can be mitigated through the design of fiscal adjustment.

The impact of fiscal consolidation and economic growth on debt: Evidence from India

This paper analyses the challenges debt reduction faces as a result of fiscal consolidation and the effect of growth on India?s debt ratio. Simulations are conducted based on India?s current revenue and debt levels and project different cases of fiscal tightening and their effect on changes in debt stock with respect to the change in GDP, i.e., changes in the debt ratio. The estimates for multipliers that are used in the Structural Vector Auto Regression (SVAR) model are obtained empirically by giving shocks to fiscal instruments such as expenditure and taxes. A non-technical approach to the SVAR methodology is used to analyse the dynamics of the studied framework by subjecting it to unexpected shocks. A more measured act of consolidation may be implemented in an attempt to normalise multiplier values in order to create an appropriate environment for reducing government spending. The drawbacks include the limitations of the SVAR methodology such as the orthogonality condition, which makes the entire analysis fairly restrictive. The framework used for the analysis is a modern approach towards understanding macroeconomic trends and variables in the context of the Indian economy and seeks to apply recently developed analytical tools.

The Impact of Fiscal Consolidation on Human Development

AbstractWe find that fiscal austerity is associated with a reduction of human development standards, with the negative effect being particularly severe in the case of spending‐driven consolidation episodes. Fiscal adjustments are especially damaging for human development in developing countries (namely, African and Latin American countries). Additionally, the empirical evidence shows that (i) government stability is a crucial institutional determinant of human development, and (ii) while investment in physical capital can boost human development, government consumption and inflation are detrimental to it. Copyright © 2017 John Wiley & Sons, Ltd.

The Impact of Fiscal Consolidations on Growth in Sub-Saharan Africa

This paper examines the output effects of changes in public expenditure and revenue in sub-Saharan African countries during 1990–2016. Fiscal multipliers in sub-Saharan Africa are somewhat smaller than those in advanced and emerging economies. The effect of changes in fiscal policy on output depends on the composition: cutting public investment has a larger effect on output than cutting public consumption or raising revenue. Episodes of fiscal consolidation have short- and medium-term output effects, but here, too, composition matters: fiscal consolidations based on reducing public investment have the largest effect on output, while fiscal consolidations based on revenue mobilization are less harmful than those based on public investment cuts. These findings suggest that the negative impact on growth can be mitigated through the design of fiscal adjustment and the accompanying policy environment.

Restoring Balance in Public Finance in Europe in the Light of the Fiscal Compact

The aim of this article is to assess the extent to which Member States have achieved their medium-term budgetary objectives (MTOs) and the benchmark for government debt reduction in the light of the Fiscal Compact’s provisions. It also identifies the risks involved in this process. By carrying out a statistical analysis and a review of the subject literature, the author shows that less than half of Member States have managed to meet the requirements imposed by the Fiscal Compact. The analysis suggests that the impact of fiscal consolidation on economic growth is seen as one of the main reasons for this state of affairs. The author regards the provisions of the Fiscal Compact as a welcome step towards anchoring fiscal discipline in Europe. If it is implemented and strictly enforced, they should strengthen the existing fiscal governance framework and foster its credibility in the future, substantially reducing the risk of another sovereign debt crisis.

The Impact of Fiscal Consolidations on Growth in Sub-Saharan Africa

This paper examines the output effects of changes in public expenditure and revenue in sub-Saharan African countries during 1990-2016. Fiscal multipliers in sub-Saharan Africa are somewhat smaller than those in advanced and emerging economies. The effect of changes in fiscal policy on output depends on the composition: cutting public investment has a larger effect on output than cutting public consumption or raising revenue. Episodes of fiscal consolidation have short- and medium-term output effects, but here, too, composition matters: fiscal consolidations based on reducing public investment have the largest effect on output, while fiscal consolidations based on revenue mobilization are less harmful than those based on public investment cuts. These findings suggest that the negative impact on growth can be mitigated through the design of fiscal adjustment and the accompanying policy environment.

The impact of fiscal consolidations on the functional components of government expenditures

This paper analyses how the functional components and sub-components of government expenditures are affected by fiscal consolidations. A fixed-effects estimator is employed over a panel of 15 European Union countries during the period 1990–2012. The results show that spending on public services increases during fiscal consolidations, while spending on defence, public order, health, education and social protection is significantly cut. A more disaggregated analysis proves that fiscal consolidations are harmful for important social expenditures, in particular, for those related to citizens’ safety, health assistance, social protection and investment in human capital. This evidence is even stronger in a particular group of countries, known in the literature as PIIGS. Hence, fiscal consolidations can have important implications on the living standards of the more economically vulnerable citizens.

Unemployment, Labour Market Institutions, Fiscal Imbalances and credit Constraints: New Evidence on an Active Debate

Using a sample of 20 OECD countries from 1970 to 2013 and accounting for cross‐sectional and temporal dependence in the regressions' disturbances, the paper examines the combined influence of labour market institutions, fiscal imbalances and credit constraints on unemployment. We demonstrate that unemployment exhibits high persistence. It is also closely associated with business cycle fluctuations, albeit mostly in economies under adjustment programmes (Spain, Ireland, Italy and Portugal). Evidence on the association between labour and product market institutions and unemployment remains inconclusive. The effect of large fiscal consolidation episodes on unemployment is consistently positive and significant, especially during the crisis period (2008–13) and in countries with strict employment protection regulation. High growth rates of GDP that reflect economic activity rebound, may partly neutralize the positive and significant impact of fiscal consolidation on unemployment.

The ECB's OMTs: A tale of governments, investors, and the central bank

This paper analyses official financial assistance via ESM programmes, with and without the ECB's OMTs. As long as macroeconomic imbalances are small, ESM stand-alone programmes galvanize creditors into rolling over their loans, alleviate the liquidity crisis and help the country to implement adjustment policies. Yet the impact of fiscal consolidation and structural reforms is likely to be recessionary in the short run, since these reforms take a long time to pay off. Recessionary effects raise strategic uncertainty in the roll-over decisions of creditors, thus reducing the effectiveness of ESM liquidity assistance. With large imbalances, liquidity problems can only be overcome with credible and sizable official assistance. Adding OMTs to an ESM programme mitigates the policy dilemma, but does not fully restore investor confidence when macroeconomic imbalances are too large.

Global Fiscal Consolidation

The build up in government debt in response to the 'great recession' has raised a number of policy dilemmas for individual countries as well as the world as a whole. Where the government fiscal stimulus was seen as necessary to restore confidence to markets and stimulate deteriorating economies in the aftermath of the 'great recession' by 2010 the massive fiscal stimulus programs and associated run-up in debt had, for many economies, become a confidence sapping exercise. This need for a change of fiscal policy stance has fueled another debate that has two related aspects. One is the impact of fiscal consolidation on economies that are tightening and the flow-on effects to the world economy. The other debate is how much tightening there should be and how quickly.This paper explores these issues in a global framework focusing on the national and global consequences of coordinated fiscal consolidation. It explores the implications this fiscal adjustment might have on country risk premia and what happens if all countries coordinate their fiscal adjustment except the United States. A coordinated fiscal consolidation in the industrial world that is not accompanied by US actions is likely to lead to a substantial worsening of trade imbalances globally as the release of capital in fiscally contracting economies flows into the US economy, appreciates the US dollar and worsens the current position of the US. The scale of this change is likely to be sufficient to substantially increase the probability of a trade war between the United States and other economies. In order to avoid this outcome, a coordinated fiscal adjustment is clearly in the interest of the global economy.

Global Fiscal Consolidation

The buildup in government debt in response to the “great recession,” has raised a number of policy dilemmas for individual countries as well as the world as a whole. The recent need for a change of fiscal policy stance has fuelled debates about the impact of fiscal consolidation on domestic economies that are tightening, the flow-on effects to the world economy, and also about how much tightening there should be and how quickly it should happen. This paper explores these issues in a global framework focusing on the national and global consequences of coordinated fiscal consolidation. It explores the implications this fiscal adjustment might have on country risk premia and what happens if all countries coordinate their fiscal adjustment except the United States. A coordinated fiscal consolidation in the industrial world that is not accompanied by U.S. actions is likely to lead to a substantial worsening of trade imbalances globally as the release of capital in fiscally contracting economies flows into the U.S. economy, appreciates the U.S. dollar, and worsens the current account position of the United States. The scale of this change is likely to be sufficient to substantially increase the probability of a trade war between the United States and other economies. To avoid this outcome, a coordinated fiscal adjustment is clearly in the interest of the global economy.

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Introduction