The (Subjective) Well-Being Cost of Fiscal Policy Shocks

48 Pages Posted: 28 Feb 2020

See all articles by Kodjovi Eklou

Kodjovi Eklou

International Monetary Fund (IMF)

Mamour Fall

Université de Sherbrooke

Date Written: January 2020

Abstract

Do discretionary spending cuts and tax increases hurt social well-being? To answer this question, we combine subjective well-being data covering over half a million of individuals across 13 European countries, with macroeconomic data on fiscal consolidations. We find that fiscal consolidations reduce individual well-being in the short run, especially when they are based on spending cuts. In addition, we show that accompanying monetary and exchange rate policies (disinflation, depreciations and the liberalization of capital flows) mitigate the well-being cost of fiscal consolidations. Finally, we investigate the well-being consequences of the two well-knowns expansionary fiscal consolidations episodes taking place in the 80s (in Denmark and Ireland). We find that even expansionary fiscal consolidations can have well-being costs. Our results may therefore shed some light on why some governments may choose to consolidate through taxes even at the cost of economic growth. Indeed, if spending cuts are to generate a large well-being loss, they can trigger an opposition and protest against a fiscal consolidation plan and hence making it politically costly.

Keywords: Fiscal consolidation, Tax increases, Fiscal policy, Gross capital formation, Economic conditions, Fiscal Consolidations, Subjective Well-Being, Spending cuts, Tax hikes, WP, life satisfaction, spend cut, tax hike, well-being

JEL Classification: D69, E62, H20, H5, I3, N10, E01, H71, E2, E52

Suggested Citation

Eklou, Kodjovi and Fall, Mamour, The (Subjective) Well-Being Cost of Fiscal Policy Shocks (January 2020). IMF Working Paper No. 20/5, Available at SSRN: https://ssrn.com/abstract=3545293

Kodjovi Eklou (Contact Author)

International Monetary Fund (IMF) ( email )

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

Mamour Fall

Université de Sherbrooke ( email )

2500 bd de l'Universite
Sherbrooke, Québec J1K 2R1
Canada

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