Successful Fiscal Adjustments - Does Choice of Fiscal Instrument Matter?

47 Pages Posted: 13 Nov 2013

See all articles by Steinar Holden

Steinar Holden

University of Oslo - Department of Economics; Norges Bank; CESifo (Center for Economic Studies and Ifo Institute)

Nina Midthjell

University of Oslo

Multiple version iconThere are 2 versions of this paper

Date Written: October 13, 2013

Abstract

We examine fiscal adjustment episodes in 24 OECD countries in order to find how austerity affects debt and growth, 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. Our main innovations over these studies are to better account for initial conditions and to employ a novel and more precise measure of actual changes in fiscal policy. 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: H200, H300, H500, H620

Suggested Citation

Holden, Steinar and Midthjell, Nina, Successful Fiscal Adjustments - Does Choice of Fiscal Instrument Matter? (October 13, 2013). CESifo Working Paper Series No. 4456, Available at SSRN: https://ssrn.com/abstract=2353306 or http://dx.doi.org/10.2139/ssrn.2353306

Steinar Holden (Contact Author)

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway
+47 22 85 51 56 (Phone)
+47 22 85 50 35 (Fax)

HOME PAGE: http://folk.uio.no/~sholden/

Norges Bank ( email )

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Oslo, N-0107
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CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Nina Midthjell

University of Oslo ( email )

PO Box 6706 St Olavs plass
Oslo, N-0317
Norway

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