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THE GROWTH IMPACT OF DISCRETIONARY FISCAL POLICY MEASURES
Maria Grazia Attinasi and Alexander KlemmIn 2014 all ECB publications feature a motif taken from the €20 banknote.NOTE: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily refl ect those of the ECB.
AcknowledgementsWe are grateful to the ESCB's Working Group on Public Finance (WGPF) for authorising the use of data from the 'disaggregated approach' for this study. These data are confi dential, and therefore they are not reported herein. The opinions expressed herein are those of the authors and do not necessarily refl ect those of the European Central Bank or the Eurosystem. The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management.
Maria Grazia AttinasiEuropean Central Bank; maria_grazia.attinasi@ecb.int
Alexander KlemmInternational Monetary Fund; e-mail: aklemm@imf.org
ABSTRACTThis paper looks at the impact of discretionary fiscal policy on economic growth for a sample of 18 EU countries over the period 1998-2011. The main novelty of this paper is the use, on the revenue side, of a dataset of fiscal measures based on the yield of actual legislative and budgetary measures, rather than approximations, such as changes in cyclically-adjusted variables. Using static and dynamic panel data techniques, we find that fiscal consolidation can be a drag on economic growth in the short-term, although some specific budget categories are not found to be statistically significant. In general, the results also indicate that expenditurebased adjustment tends to be less harmful than revenue-based adjustment. Among expenditure cuts, reductions in government investment and consumption are found to be growth reducing. Among revenues, indirect tax increases are found to have a particularly strong negative impact. Dynamic specifications suggest that consolidation reduces growth mainly in the year of fiscal adjustment, while future growth rates are affected only through the usual time persistence. Nonlinear specifications indicate that spreading out consolidation reduces the negative impact on growth, but only very slightly and in the absence of financial market pressures and/or fiscal sustainability considerations. Additionally, front-loading fiscal consolidation appears to be less detri...