How Much is a Lot? Historical Evidence on the Size of Fiscal Adjustments

37 Pages Posted: 4 Nov 2014

See all articles by Julio Escolano

Julio Escolano

International Monetary Fund (IMF) - Fiscal Affairs Department

Carlos Mulas-Granados

Government of the Kingdom of Spain - Economic Bureau of the President

G. Terrier

International Monetary Fund

Laura Jaramillo

International Monetary Fund (IMF)

Date Written: September 2014

Abstract

The sizeable fiscal consolidation required to stabilize the debt-to-GDP ratios in several countries in the aftermath of the global crisis raises a crucial question on its feasibility. To answer this question, we rely on historical evidence from a sample of 91 adjustment episodes of countries during 1945-2012 that needed and wanted to adjust in order to stabilize debt to GDP. We find that, in at least half the cases, countries improved their cyclically adjusted primary balances by close to 5 percent of GDP. We also observe that, while countries typically make substantial efforts to stabilize debt, once this objective is achieved, they tend to ease their primary balances and do not necessarily get back to their initial lower debt-to-GDP ratio. We find that consolidations tended to be larger when the initial deficit was high and adjustment efforts were sustained over time. Fiscal adjustments also tended to be larger when accompanied by an easing of monetary conditions and, to a lesser extent, by an improvement in credit conditions.

Keywords: Fiscal adjustment, Fiscal consolidation, Debt sustainability, Fiscal stabilization, Econometric models, Deficit, primary balance, size of adjustment, fiscal sustainability, fiscal adjustments, fiscal consolidations, fiscal policy, public debt, fiscal consolidation episodes, expenditure cuts, primary expenditure, fiscal tightening, fiscal contractions, fiscal surplus, primary balance ratio, fiscal adjustment episodes, spending cuts, fiscal variables, discretionary fiscal policy, fiscal need, fiscal impulse, fiscal indicators, public expenditure reform, fiscal positions, budgetary consolidation, budget balance, fiscal prudence, increase in consumption, tax changes, fiscal policy instruments, t

JEL Classification: H11, H63, H62

Suggested Citation

Escolano, Julio and Mulas-Granados, Carlos and Terrier, Gilbert L. and Jaramillo, Laura, How Much is a Lot? Historical Evidence on the Size of Fiscal Adjustments (September 2014). Available at SSRN: https://ssrn.com/abstract=2519005 or http://dx.doi.org/10.2139/ssrn.2519005

Julio Escolano (Contact Author)

International Monetary Fund (IMF) - Fiscal Affairs Department

700 19th Street, NW
Washington, DC 20431
United States

Carlos Mulas-Granados

Government of the Kingdom of Spain - Economic Bureau of the President ( email )

28071 Madrid
Spain

Gilbert L. Terrier

International Monetary Fund

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

Laura Jaramillo

International Monetary Fund (IMF) ( email )

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

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