Periods Of Fiscal Consolidation Research Articles

Fiscal consolidation in China: a dynamic computable general equilibrium analysis

ABSTRACT Inflation and overcapacity caused by fiscal expansion have begun to plague China’s economy. The surge in public debt caused by the perennial high deficit rate has led to accumulated debt risk. The lessons of the European debt crisis have forced China to re-examine its debt sustainability. A larger and more systematic fiscal consolidation is urgent. Based on China’s multiple fiscal accounts, this paper constructs a dynamic computable general equilibrium (CGE) model suitable for China’s scenario. By simulation, we evaluated the economic effects of revenue-based and spending-based fiscal consolidation and mixed consolidation and drew the following conclusions: (1) The success of fiscal consolidation requires paying a certain economic price. The industrial sectors closely related to the government bear more pressure from consolidation, which makes spending-based consolidation measures more advantageous in terms of cost because of their lower negative externalities. (2) China’s social security system has mitigated the effect on households during periods of fiscal consolidation, but the social insurance fund bears greater losses. (3) The mixed strategy of combining revenue and spending balance the contradiction between economic development and industrial structure in consolidation. While protecting the industrial structure, this strategy can complete the consolidation goal at a small economic cost.

How Fiscal Rules Matter for Successful Fiscal Consolidations: New Evidence

Abstract Fiscal rules are increasingly promoted by international organizations. We investigate whether fiscal rules are effective in achieving sustained debt reduction during periods of fiscal consolidation using data from 19 OECD countries. The analysis is based on an extended version of the International Monetary Fund’s fiscal rules database. Fiscal consolidation periods are identified using a novel method that takes differences in the variability of fiscal balances into account. We find: (i) the EU’s Stability and Growth Pact is associated with sustained debt reduction while it is more doubtful if the mere existence of national fiscal rules has an effect. (ii) Fiscal rules have a stronger association with sustained debt reduction when they are embedded in a stricter national institutional framework (JEL codes: H6).

Reformingsuo tempore: Exploring the unintended consequences of the European Union’s ‘reform actorness’

The European Union is broadly considered a benign reform actor, encouraging and supporting reforms in member states and beyond. However, European Union-induced reforms do not only generate the intended effects; they can also trigger unintended consequences for other reforms. These unintended consequences occur primarily through the impact of European Union-induced reforms on the resources available. The scope and size of the unintended effects will be conditioned by the domestic cycles in economic and public policy-making. Here, we apply our analytical framework to study the resilience of governance reforms in Greece during the period of fiscal consolidation (2010–2015), highlighting the unintended consequences of the European Union’s ‘reform actorness’. We find that the distinction between financial and non-financial resources is critical in unpacking the unintended consequences of any exogenously driven reform. Depending on the current stage in the cycles, the impact on non-financial resources can generate positive side-effects that help prevent other ongoing domestic reforms being derailed.

Government ideology and fiscal consolidation: Where and when do government parties adjust public spending?

Recent studies indicate that the ideological stances of government parties no are longer associated with differences in total government spending. At the same time, we observe that political polarization over spending policies has deepened. This paper addresses that puzzle by analyzing government spending behavior for ten expenditure categories during both ‘normal’ times and periods of fiscal consolidation between 1995 and 2015 for 16 OECD countries. Our results indicate that partisan motives prevail in ‘normal’ times: right-wing cabinets spend more on defense and less on education and environmental protection than left-wing governments. On the other hand, in periods of fiscal adjustment, differences between left- and right-wing government expenditures can be observed mostly in different budget categories. For instance, during fiscal consolidations, right-wing governments reduce spending more than their left-wing counterparts on those categories featuring large shares of public employee compensation (i.e., public consumption spending) and small capital-expenditure shares. Hence, a central message of this paper helping to resolve the aforementioned puzzle is that ideological differences remain important after taking a comprehensive look at individual spending categories and distinguishing between periods with and without adjustments.

Flattening the Debt Curve: Empirical Lessons for Fiscal Consolidation

This paper reviews the empirical literature to determine which forms of fiscal consolidation successfully reduce debt-to-GDP ratios and impact economic performance. We perform a cross-country analysis of fiscal adjustments in 26 democracies for 1995–2018 and find that expenditure-based fiscal adjustments are notably more successful at lowering debt levels than tax-based adjustments, with successful adjustments focusing around two-thirds on the expenditure side. Expenditure-based adjustments tend to cause small contractions, not significantly different from zero, while tax-based adjustments cause deep and long-lasting recessions. In addition, we find that periods of fiscal consolidation that last more than two years tend to be twice as successful as those that last only two years or less. We do not find the size of the fiscal consolidation to be a key determining factor in the success of fiscal adjustments.

The politics of fiscal consolidation and reform under external constraints in the European periphery: comparative study of Hungary and Latvia

ABSTRACTThis article investigates the diverse experiences of fiscal consolidation under external constraints in Hungary and Latvia. The financial crisis that hit in the early years of the twenty-first century had a profound effect on the economies of many EU member states. The responses, however, were diverse. Some countries, such as Latvia, implemented deep consolidation within a relatively short amount of time, while retaining political stability. Other countries, such as Hungary, went through an extensive period of fiscal consolidation, and experienced a significant shift in domestic politics. This paper looks at the factors explaining the variety of responses to the crisis.

Choosing the path of austerity: how parties and policy coalitions influence welfare state retrenchment in periods of fiscal consolidation

What are the conditions under which some austerity programmes rely on substantial cuts to social spending? More specifically, do the partisan complexion and the type of government condition the extent to which austerity policies imply welfare state retrenchment? This article demonstrates that large budget consolidations tend to be associated with welfare state retrenchment. The findings support a partisan and a politico-institutionalist argument: (i) in periods of fiscal consolidation, welfare state retrenchment tends to be more pronounced under left-wing governments; (ii) since welfare state retrenchment is electorally and politically risky, it also tends to be more pronounced when pursued by a broad pro-reform coalition government. Therefore, the article shows that during budget consolidations implemented by left-wing broad coalition governments, welfare state retrenchment is greatest. Using long-run multipliers from autoregressive distributed lag models on 17 OECD countries during the 1982–2009 period, substantial support is found for these expectations.

Fiscal Policy, does it Really Matter? The (non) Impact of Fiscal Consolidation Policies on Growth

Following the outbreak of the sovereign debt crisis in the euro zone, austerity policies have emerged as the solution to the ills devastating the economies on the periphery. The impact of fiscal consolidation policies on growth remains an open question. There is widespread acceptance of a short-term negative impact alongside a broad range of opinions regarding the results in the medium and long term. This difference of opinion is primarily the result of the various theoretical approaches applied to this analysis. Because of its importance, in this article we take a predominantly applied approach to characterizing the effects of the processes involved in public deficit reduction at the macro level. Our result mainly rely in a statistical description of the results reported by the different European economies in periods of fiscal consolidation.

Periods of Fiscal Consolidation in Selected European Economies

Economic crisis exacerbated short-term overview for fiscal sustainability in the European Union member countries. Increased burden of the sovereign debt was followed soon by intention of governments to provide an effective timetable of crucial and inevitable fiscal consolidation procedures.In the paper we provide an overview of main trends in public budgets and sovereign debts in European economies from the past Eastern block of countries during last two decades. We identify episodes of successful and unsuccessful (cold showers versus gradual) fiscal (expenditure versus revenue based) consolidations by analyzing effects of improvements in the cyclically adjusted primary balance on the sovereign debt ratio reduction. Effects of fiscal consolidating adjustments are evaluated for pre-crisis and crisis periods to reveal crisis effects on fiscal consolidation efforts. We also provide ideas about a feasibility of expenditure versus revenue based fiscal consolidation episodes (i.e. side effects on the macroeconomic performance).

Public Redistribution and Inequality in a Period of Fiscal Consolidation: A Decomposition Analysis for Canada in the 1980s and 1990s

This article documents the evolution of income inequality during Canada's major fiscal consolidation of the mid-1980s to the mid-1990s, one of the most spectacular fiscal turnarounds in recent economic history. Our main objective is to understand why overall market income inequality rose between 1986 and 1996, while that of disposable income did not. To analyse this question, we use data from the Survey of Consumer Finances and two distinct decomposition methodologies. Our results show that both the automatic stabilisation effect of transfer programmes and the rise in personal income taxes explain the performance of the Canadian tax and transfer system in offsetting market income inequality growth during the fiscal consolidation decade. Canada's fiscal consolidation episode, which placed more weight on rising taxes than on cuts in transfer programmes, was thus an inequality reducing factor.

How Does Fiscal Consolidation Impact on Income Inequality?

In this paper, we assess the impact of fiscal consolidation on income inequality. Using a panel of 18 industrialized countries from 1978 to 2009, we find that income inequality significantly rises during periods of fiscal consolidation. In addition, while fiscal policy that is driven by spending cuts seems to be detrimental for income distribution, tax hikes seem to have an equalizing effect. We also show that the size of the fiscal consolidation program (in percentage of GDP) has an impact on income inequality. In particular, when consolidation plans represent a small share of GDP, the income gap widens, suggesting that the burden associated with the effort affects disproportionately households at the bottom of the income distribution. Considering the linkages between banking crises and fiscal consolidation, we find that the effect on the income gap is amplified when fiscal adjustments take place after the resolution of such financial turmoil. Similarly, fiscal consolidation programs combined with inflation are likely to increase inequality and the effects of fiscal adjustments on inequality are amplified during periods of relatively low growth. Our results also provide support for a non‐linear relationship between inequality and income and corroborate the idea that trade can promote a more equal distribution of income.

Appraising the Effects of the Budget on the Economy with an Econometric Model: The Italian Fiscal Adjustment in the Nineties

This paper describes a procedure for assessing the effects of the budget on economic activity in the short term. Based on counterfactual simulations of an econometric model, the procedure takes into account more relationships between the budget and the economy than other, more synthetic indicators. It not only measures the impact of the budget on output but also evaluates how the budget affects prices and other macroeconomic variables. Moreover, the procedure provides estimates of the effects of specific features of the budget, such as its composition.The procedure is used to appraise the impact of the budget on the Italian economy in the period 1991-2000, using the Bank of Italy’s Quarterly Econometric Model. During the period of fiscal consolidation (1991-97), the impact on GDP growth was generally negative, averaging about -0.6 percentage points (with a spike of -1.4 points in 1995). As fiscal policy relaxed once Italy had succeeded in joining the Monetary Union, the impact on output growth became slightly positive, as in 1998 and 1999, or neutral, as in 2000. Even within the generally restrictive context, the budget exerted a mildly counter-cyclical influence. This result is in line with the findings of previous literature for the 1970s and 1980s. The composition of the budget often played a significant role, in some years amplifying the impact on the primary deficit, in others reducing or even offsetting it. In the period 1991-97, changes in the composition substantially increased the costs of fiscal adjustment. The average impact of the budget on inflation was basically nil in the decade. The results appear significantly different, both quantitatively and qualitatively, from those obtained using the synthetic budget indicators commonly used to assess the fiscal stance. Lastly, a number of additional experiments assess the sensitivity to changes in some key assumptions. In particular, a forward-looking specification of consumers’ behaviour and a forward-looking Taylor-type monetary policy reaction function were estimated and used in the counterfactual simulations. Neither results in significant modifications in the paper’s main conclusions.

Income Inequality and Fiscal Policy (2nd Edition)

This note will describe recent trends in income inequality in both advanced and developing economies and how tax and expenditure policies have impacted on these trends. It will discuss how tax and expenditure policies should be designed to bring about a more equitable distribution of income, as well as to protect the most vulnerable populations during periods of fiscal consolidation.

How Does Fiscal Consolidation Impact on Income Inequality?

In this paper, we assess the impact of fiscal consolidation on income inequality. Using a panel of 18 industrialized countries from 1978 to 2009, we find that income inequality significantly rises during periods of fiscal consolidation. In addition, while fiscal policy that is driven by spending cuts seems to be detrimental for income distribution, tax hikes seem to have an equalizing effect. We also show that the size of the fiscal consolidation program (in percentage of GDP) has an impact on income inequality. In particular, when consolidation plans represent a small share of GDP, the income gap widens, suggesting that the burden associated with the effort affects disproportionately households at the bottom of the income distribution. Considering the linkages between banking crises and fiscal consolidation, we find that the effect on the income gap is amplified when fiscal adjustments take place after the resolution of such financial turmoils. Similarly, fiscal consolidation programs combined with inflation are likely to increase inequality and the effects of fiscal adjustments on inequality are amplified during periods of relatively low growth. Our results also provide support for a nonlinear relationship between inequality and income and corroborate the idea that trade can promote a more equal distribution of income.

Fiscal Federalism, Fiscal Consolidations and Cuts in Central Government Grants: Evidence from an Event Study

This paper contributes to a developing literature that examines financial interactions between different levels of government. More specifically, we investigate the use of grants, shared tax revenues, and their impact on fiscal outcomes, including decentralized service provision. Most existing empirical evidence has focused on individual country studies, and has predominantly been US based. However, it is difficult to generalize the conclusions obtained for the US to countries where the position and remit of lower tiers of government has recently been evolving or is less clear constitutionally. We use a panel dataset covering 15 OECD countries to investigate how central and sub-central expenditures, taxation, and intergovernmental grants change in response to central governments' attempts to correct their fiscal positions. We adopt an event study methodology to examine the timing of expenditure, taxation and intergovernmental grant shifts around the periods of fiscal consolidation. In addition to highlighting issues regarding the interaction between central and sub-central tiers of government, our analysis also sheds light into the extent to which sub-central tiers of government participate in fiscal consolidations, and hence to macroeconomic adjustment. Our key results can be summarized as follows. First, successful fiscal consolidations are generally driven by similar, and sustained, falls in expenditure at both central and sub-central tiers. Moreover, our evidence counters that identified by Gramlich (1987) for the USA, in that when central governments cut intergovernmental grants sub-central tiers do not take redress through offsetting increases in other forms of revenues. Second, unsuccessful consolidations tend to be characterized by increased central government taxation, with no fall back in grants and no tendency for sub-central taxation to change. It does appear that there is strong correlation between success in consolidating central fiscal deficits and similar actions from lower tiers of government. Third, we find that where consolidations are successful sub-central tiers of government are typically forced to cut back on capital expenditure. This suggests that in this regard the burden of adjustment falls onto lower tiers of government and central governments worry less about the long-term (i.e. public investment) consequences of consolidation if these decisions are taken at local level. We also find that when faced with cuts in intergovernmental grants, sub-central governments tend to maintain expenditures on wages at the expense of capital expenditure, reflecting a definite compositional switch towards public consumption. This might be interpreted as a variant of the effect identified by Gramlich (1987): sub-central governments seeking to defend current services rather than spending on infrastructure or raising taxation. This may reflect the greater constraints on sub-central tiers’ tax raising powers in many of the OECD countries in our sample, relative to those in the USA. Finally, our results shed some light, at least indirectly, on the ‘Fly-paper Effect’, by showing that it operates in reverse. Successful consolidations are characterized by cut-backs in grants that are more than offset by cut-backs in sub-central expenditures. In contrast, periods of unsuccessful consolidation are characterized by increases in central taxation, no change in grants, and small, temporary reductions in sub-central expenditure.

Fiscal adjustment in Brazil

Two questions are addressed in this paper. The first one is the determination of periods of fiscal consolidation and fiscal stimulus. The second one is the importance of the composition of fiscal adjustments for their success, defined as a declining debt to GDP ratio. We, characterize 1994 and 1999 as points of fiscal consolidation. The 1994 consolidation can not be considered successful since after that period the debt to GDP ratio has grown continuously. The adjustment can be characterized as a type 2 adjustment (Alesina and Perotti (1997)) in the sense that cuts were made mainly in public investment, while government wages and transfers remained almost unchanged. This type of adjustment usually has a low likelihood of being a success.