Budget Consolidation: Short-Term Pain and Long-Term Gain

34 Pages Posted: 19 Jul 2010

See all articles by Michael Kumhof

Michael Kumhof

Bank of England

Kevin Clinton

Government of Canada - Bank of Canada

Susanna Mursula

International Monetary Fund (IMF)

Douglas Laxton

International Monetary Fund (IMF) - Research Department

Date Written: July 2010

Abstract

The paper evaluates the costs and benefits of fiscal consolidation using simulations based on the IMFs global DSGE model GIMF. Over the longer run, well-targeted permanent reductions in budget deficits lead to a considerable increase in both the growth rate and the level of output. The gains may be enhanced by shifting some of the tax burden from incomes to consumption. In the short run, credibility plays a crucial role in determining the size of initial output loses. Global current account imbalances would be significantly reduced if budget consolidation was larger in countries with current account deficits.

Suggested Citation

Kumhof, Michael and Clinton, Kevin and Mursula, Susanna and Laxton, Douglas, Budget Consolidation: Short-Term Pain and Long-Term Gain (July 2010). IMF Working Paper No. 10/163, Available at SSRN: https://ssrn.com/abstract=1641014

Michael Kumhof (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Kevin Clinton

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada
613-782-8766 (Phone)
613-782 7508 (Fax)

Susanna Mursula

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Douglas Laxton

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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