Working Paper: CEPR ID: DP13565
Authors: Carlo A. Favero; Francesco Giavazzi; Alberto F. Alesina
Abstract: We review the debate surrounding the macroeconomic effects of deficit reduction policies (austerity). The discussion about "austerity" in general has distracted commentators and policymakers from a very important result, namely the enormous difference, on average, between expenditure- and tax-based austerity plans. Spending-based austerity plans are remarkably less costly than tax-based plans. The former have on average a close to zero effect on output and lead to a reduction of the debt over GDP ratio. Tax-based plans have the opposite effect and cause large and long lasting recessions. These results also apply to the recent episodes of European austerity which in this respect were not especially different from previous cases.
Keywords: austerity; fiscal adjustment; plans; output growth
JEL Codes: E60; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expenditure-based austerity (E62) | economic output (E23) |
| tax-based austerity (H69) | economic output (E23) |
| spending cuts (H56) | expectations of lower future taxes (H32) |
| expectations of lower future taxes (H32) | private consumption and investment (E20) |
| tax increases (H29) | expectations of higher future taxes (H31) |
| expectations of higher future taxes (H31) | negative impact on economic behavior (E71) |
| expenditure-based austerity (E62) | less recessionary than tax increases (E65) |