Finance & Development, September 2011
4 Pages Posted: 29 Sep 2011
Date Written: September 27, 2011
Will deficit reduction lead to stronger growth and job creation in the short run? Recent IMF research provides an answer to this question. Evidence from data over the past 30 years shows that consolidation lowers incomes in the short term, with wage-earners taking more of a hit than others; it also raises unemployment, particularly long-term unemployment. Advanced economies need to restore fiscal sustainability through credible consolidation plans. At the same time, slamming on the brakes too quickly will hurt the recovery and worsen job prospects. Hence the potential longer-run benefits of fiscal consolidation must be balanced against the short- and medium-run adverse impacts on growth and jobs.
Keywords: fiscal consolidation, fiscal austerity, unemployment, jobs, wages
JEL Classification: E32, E62, H20, H5, N10
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