Working Paper: NBER ID: w24246
Authors: Alberto F. Alesina; Carlo Favero; Francesco Giavazzi
Abstract: This paper summarizes the results of a large recent literature on multi year fiscal plans for deficit reduction (austerity). The key results are that deficit reduction policies based upon spending cuts are much less costly in terms of short run output losses than tax based adjustments. On average fiscal adjustment based upon spending cuts have very small output costs and in some cases they are expansionary. We then discuss which possible models can explain these findings and discuss how the evidence can disentangle them.
Keywords: Austerity; Fiscal Policy; Spending Cuts; Tax Increases
JEL Codes: E0; H0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Expenditure-based austerity (EB) (H69) | Output growth (O40) |
| Tax-based austerity (TB) (H29) | Output growth (O40) |
| EB plan worth 1% of GDP (E20) | GDP loss of about 0.5% (F69) |
| TB plan worth 1% of GDP (H87) | Average GDP fall of 2% (E20) |
| Certain cases of EB austerity (E65) | Immediate increases in GDP growth (O49) |
| Timing and composition of fiscal measures (E63) | Economic impacts (F69) |
| Differences in output responses between EB and TB plans (C22) | Macroeconomic outcomes (E19) |