Flattening the Debt Curve: Empirical Lessons for Fiscal Consolidation

19 Pages Posted: 31 Jul 2020

See all articles by Veronique de Rugy

Veronique de Rugy

George Mason University - Mercatus Center

Jack Salmon

George Mason University - Mercatus Center

Date Written: July 22, 2020

Abstract

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

de Rugy, Veronique and Salmon, Jack, Flattening the Debt Curve: Empirical Lessons for Fiscal Consolidation (July 22, 2020). Mercatus Special Study, Available at SSRN: https://ssrn.com/abstract=3664152 or http://dx.doi.org/10.2139/ssrn.3664152

Veronique De Rugy (Contact Author)

George Mason University - Mercatus Center ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

HOME PAGE: http://www.mercatus.org/scholars/veronique-de-rugy

Jack Salmon

George Mason University - Mercatus Center ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

HOME PAGE: http://https://www.mercatus.org/people/jack-salmon

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