Reconciling Fiscal Consolidation with Growth and Equity

OECD Journal: Economic Studies, Vol. 2013, Issue 1. DOI: 10.1787/19952856

Posted: 25 Aug 2015

See all articles by Boris Cournede

Boris Cournede

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO)

Antoine Goujard

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO)

Alvaro Pina

Organization for Economic Co-Operation and Development (OECD); University of Lisbon - ISEG School of Economics and Management

Date Written: February 5, 2014

Abstract

Despite sustained efforts made in recent years to rein in budget deficits, a majority of OECD countries still face substantial public finance consolidation needs. While essential to avoid the disruption and large costs ultimately associated with unsustainable public finances, fiscal consolidation complicates the task of achieving other policy goals. In most cases, it weighs on demand in the short term. And, if too little attention is paid to the mix of instruments used to achieve consolidation, it can undermine long-term growth, exacerbate income inequality and slow the process of global rebalancing. It is therefore important for governments to adopt consolidation strategies that minimise these adverse side-effects. The analysis proposes consolidation strategies that take into account other policy goals as well as country-specific circumstances and preferences. To do so, increases in particular taxes and cuts in specific spending areas are assessed for their effects on short- and long-term growth, income distribution and external accounts. The results of detailed illustrative simulations indicate that a significant number of OECD countries may have to raise harmful taxes or cut valuable spending areas to deliver sufficient consolidation, underscoring the need for structural reforms to counteract these side-effects. The results are robust to an extensive range of sensitivity checks.

Keywords: Fiscal consolidation, growth, equity, global imbalances, income distribution, structural reforms

JEL Classification: H62, H63, H68

Suggested Citation

Cournede, Boris and Goujard, Antoine and Pina, Alvaro, Reconciling Fiscal Consolidation with Growth and Equity (February 5, 2014). OECD Journal: Economic Studies, Vol. 2013, Issue 1. DOI: 10.1787/19952856 , Available at SSRN: https://ssrn.com/abstract=2650040

Boris Cournede (Contact Author)

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO) ( email )

2 rue Andre Pascal
Paris Cedex 16, MO 63108
France
+33145249037 (Phone)

HOME PAGE: http://www.oecd.org/eco

Antoine Goujard

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO) ( email )

2 rue Andre Pascal
Paris Cedex 16, MO 63108
France

Alvaro Pina

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

University of Lisbon - ISEG School of Economics and Management ( email )

Rua Miguel Lupi nÂș 20
Lisbon, 1249-078
Portugal

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