Flattening the Debt Curve: Empirical Lessons for Fiscal Consolidation
19 Pages Posted: 31 Jul 2020
Date Written: July 22, 2020
This paper reviews the empirical literature to determine which forms of fiscal consolidation successfully reduce debt-to-GDP ratios and impact economic performance. We perform a cross-country analysis of fiscal adjustments in 26 democracies for 1995–2018 and find that expenditure-based fiscal adjustments are notably more successful at lowering debt levels than tax-based adjustments, with successful adjustments focusing around two-thirds on the expenditure side. Expenditure-based adjustments tend to cause small contractions, not significantly different from zero, while tax-based adjustments cause deep and long-lasting recessions. In addition, we find that periods of fiscal consolidation that last more than two years tend to be twice as successful as those that last only two years or less. We do not find the size of the fiscal consolidation to be a key
determining factor in the success of fiscal adjustments.
Keywords: fiscal policy, fiscal consolidation, fiscal adjustment, budget, deficit reduction, debt management, debt, deficit
JEL Classification: E62, H62, H63, H50
Suggested Citation: Suggested Citation