Successful Fiscal Adjustments. Does Choice of Fiscal Instrument Matter?

Abstract

We examine fiscal adjustment episodes in 24 countries to study how austerity affects debt, and whether the choice of fiscal instrument matters for the results. Influential existing studies argue that spending cuts are more likely to successfully reduce debt and enhance economic growth than tax increases. We find that whether a fiscal adjustment is successful in reducing debt depends on whether the adjustment was sufficiently large to remove the budget deficit. We find no indication that it matters whether the adjustment is achieved via spending cuts or tax increases, and this conclusion holds also for the effect on economic growth.

Keywords: Fiscal adjustment, fiscal consolidation

JEL Classification: E62