Fiscal Consolidation: How Much, How Fast and by What Means?

Abstract

The OECD Economic Policy Paper Series is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or of the governments of its member countries. This paper is a revised version of the main document on fiscal consolidation (Part 1, see below) that was discussed at the OECD Economic Policy Committee and Working Party 1 meetings. The authors would like to thank the participants. More detailed information is available from the OECD Economics Department Working Paper series on Fiscal Consolidation: Part 1. How much is needed and how to reduce debt to a prudent level?, No. 932 Part 2. Fiscal multipliers and fiscal consolidations, No. 933 Part 3. Long-run projections and fiscal gap calculations, No. 934 Part 4. Case studies of large fiscal consolidation episodes, No. 935 Part 5. What factors determine the success of consolidation efforts?, No. 936 Part 6. What are the best policy instruments for fiscal consolidation?, No. 937 Series: OECD Economic Policy Papers ISSN 2226583XThis document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

The politics of cutback management in thirteen European countries: statistical evidence on causes and effects

“…Economic policy-makers utilize these findings in the debate how much consolidation is needed, how fast and with which instruments. In a series of OECD Economic Department working papers about these questions (Sutherland, Hoeller, and Merola 2012), it was once again empirically confirmed that spending-driven fiscal adjustments are more likely to reduce deficit and stabilize debt than tax-driven ones (Molnar 2012;Blöchliger, Song, and Sutherland 2012). The OECD (2012) cross-country analysis of fiscal consolidations also stipulated the preference for spending cuts over tax rises.…”

A Simple Fiscal Stress Testing Model

“…The importance of sustainable long-term debt targets has been emphasized by a number of studies and policy institutions (see e.g. Sutherland et al, 2012, for an OECD analysis of medium-term fiscal sustainability). Rogoff and Reinhardt (2010) emphasized the adverse growth effects of high debt, estimating the threshold level of debt negatively affecting growth at 90% of GDP.…”

“…However, a number of studies have found out that the composition of fiscal revenues and expenditures is an important factor of the success and durability of fiscal consolidations (e.g. Sutherland et al, 2012, Barrel et al, 2012. We abstract from these effects.…”

Improving the Fiscal Framework to Enhance Growth in an Era of Fiscal Consolidation in Slovakia

“…Until 2060, the share of ageing-related spending is estimated to increase by 7.5 percentage points of GDP if current levels of pension generosity and health provision are maintained (European Commission, 2012). According to recent OECD estimates, stabilizing debt at 50% of GDP in 2050 would require improving the underlying primary balance by 3% to 5% of GDP, on top of the current consolidation efforts, from 2012 onwards depending on assumptions on the future increases in pension and healthcare spending (Sutherland et al, 2012). While future ageing liabilities can be seen as a budgetary imbalance, it can also be viewed as a measure of reform needed to reduce the growth of ageing related spending.…”