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Successful Fiscal Adjustments: Does choice of fiscal instrument matter?

Author

Listed:
  • Holden, Steinar

    (Dept. of Economics, University of Oslo)

  • Larsson Midthjell, Nina

    (Dept. of Economics, University of Oslo)

Abstract
We examine fiscal adjustment episodes in 24 OECD countries in order to find how austerity affects debt and growth, and whether the choice of fiscal instrument matters for the results. Inuential existing studies argue that spending cuts are more likely to successfully reduce debt and enhance economic growth than tax increases. Our main innovations over these studies are to better account for initial conditions and to employ a novel and more precise measure of actual changes in fiscal policy. We find that whether a fiscal adjustment is successful in reducing debt depends on whether the adjustment was sufficiently large to remove the budget deficit. We find no indication that it matters whether the adjustment is achieved via spending cuts or tax increases, and this conclusion holds also for the effect on economic growth.

Suggested Citation

  • Holden, Steinar & Larsson Midthjell, Nina, 2013. "Successful Fiscal Adjustments: Does choice of fiscal instrument matter?," Memorandum 23/2013, Oslo University, Department of Economics.
    • Handle: RePEc:hhs:osloec:2013_023
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    File URL: https://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2013/memo-23-2013.pdf
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    References listed on IDEAS

    as
    1. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
    2. Roberto Perotti, 2012. "The "Austerity Myth": Gain without Pain?," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 307-354, National Bureau of Economic Research, Inc.
    3. Alberto Alesina & Silvia Ardagna, 2010. "Large Changes in Fiscal Policy: Taxes versus Spending," NBER Chapters, in: Tax Policy and the Economy, Volume 24, pages 35-68, National Bureau of Economic Research, Inc.
    4. Christina D. Romer & David H. Romer, 2010. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," American Economic Review, American Economic Association, vol. 100(3), pages 763-801, June.
    5. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
    6. Dario Caldara & Christophe Kamps, 2017. "The Analytics of SVARs: A Unified Framework to Measure Fiscal Multipliers," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(3), pages 1015-1040.
    7. Giovanni Callegari & Mr. Giovanni Melina & Nicoletta Batini, 2012. "Successful Austerity in the United States, Europe and Japan," IMF Working Papers 2012/190, International Monetary Fund.
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    Cited by:

    1. Breuer, Christian, 2017. "Expansionary Austerity and Reverse Causality," MPRA Paper 77556, University Library of Munich, Germany.
    2. Jakob de Haan & Rasmus Wiese, 2022. "The impact of product and labour market reform on growth: Evidence for OECD countries based on local projections," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(4), pages 746-770, June.
    3. Wiese, Rasmus & Jong-A-Pin, Richard & de Haan, Jakob, 2018. "Can successful fiscal adjustments only be achieved by spending cuts?," European Journal of Political Economy, Elsevier, vol. 54(C), pages 145-166.
    4. Piotr Ciżkowicz & Grzegorz Parosa & Andrzej Rzońca, 2022. "Fiscal tensions and risk premium," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 49(3), pages 833-896, August.
    5. Rasmus Wiese & Richard Jong-A-Pin & Jakob de Haan, 2015. "Are expenditure cuts the only effective way to achieve successful fiscal adjustment," DNB Working Papers 477, Netherlands Central Bank, Research Department.
    6. Christian Breuer, 2019. "State Expansionary Austerity and Reverse Causality: A Critique of the Conventional Approach," Working Papers Series 98, Institute for New Economic Thinking.

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    More about this item

    Keywords

    fiscal; policy;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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