The Relationship Between Large Fiscal Adjustments and Short‐term Output Growth Under Alternative Fiscal Policy Regimes

Miller, Stephen M.; Russek, Frank S.

doi:10.1093/cep/21.1.41

“…The authors argue that fiscal consolidation adjustments can have an expansionary impact on the economy via the so-called non-Keynesian effects (Feldstein, 1982). In the same line, Ardagna (1998, 2010), Miller and Russek (2003) show that growth performance is improved after periods of drastic and decisive spending cuts. Castro (2007a) finds that the growth of real GDP per capita in the EU was not negatively affected by the implementation of fiscal rules and, consequently, the implementation of the Stability and Growth Pact was not harmful from a growth perspective.…”

Section: Review Of Literaturementioning

confidence: 96%

How Does Fiscal Consolidation Impact on Income Inequality?

Agnello

¹

,

Sousa

²

2012

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The authors wish to thank Prof. Sushanta Mallick and to participants to a seminar at the Banque De France for helpful comments. The opinions expressed herein are those of the authors and do not necessarily reflect those of the Banque de France. AbstractIn this paper, we assess the impact of fiscal consolidation on income inequality. Using a panel of 18 industrialized countries from 1978 to 2009, we find that income inequality significantly rises during periods of fiscal consolidation. In addition, while fiscal policy that is driven by spending cuts seems to be detrimental for income distribution, tax hikes seem to have an equalizing effect. We also show that the size of the fiscal consolidation program (in percentage of GDP) has an impact on income inequality. In particular, when consolidation plans represent a small share of GDP, the income gap widens, suggesting that the burden associated with the effort affects disproportionately households at the bottom of the income distribution. Considering the linkages between banking crises and fiscal consolidation, we find that the effect on the income gap is amplified when fiscal adjustments take place after the resolution of such financial turmoils. Similarly, fiscal consolidation programs combined with inflation are likely to increase inequality and the effects of fiscal adjustments on inequality are amplified during periods of relatively low growth. Our results also provide support for a nonlinear relationship between inequality and income and corroborate the idea that trade can promote a more equal distribution of income.Keywords: Fiscal consolidation, income inequality, Kuznets curve. JEL: E62, E64, D63. RésuméDans cet article, nous évaluons l'impact de la consolidation budgétaire sur l'inégalité des revenus. Utilisant un panel de 18 pays industrialisés de 1978 à 2009, nous constatons que l'inégalité des revenus augmente de façon significative pendant les périodes de consolidation budgétaire. En outre, alors qu'une consolidation axée sur la réduction des dépenses semble être préjudiciable pour la distribution des revenus, des hausses d'impôts semblent avoir un effet égalisateur. Nous montrons aussi que la taille du programme de consolidation budgétaire (en pourcentage du PIB) a un impact sur l'inégalité des revenus. En particulier, lorsque les plans de consolidation ne représentent qu'une faible part du PIB, l'écart de revenu se creuse, ce qui suggère que le fardeau associé à l'effort affecte de manière disproportionnée les ménages au bas de la distribution des revenus. Considérant les liens entre crises bancaires et l'assainissement budgétaire, nous constatons que l'effet sur l'écart de revenu est amplifié lorsque des ajustements budgétaires ont lieu après la résolution de ces tourmentes financières. De même, les programmes d'assainissement budgétaire accompagnés d'inflation forte sont susceptibles d'accroître les inégalités et les effets des ajustements budgétaires sur l'inégalité sont amplifiés durant les périodes de croissance relativement faible. Nos résulta...

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“…Miller and Russek (1999) 19 OECD countries Effect on private consumption of a budget deficit increase.…”

Section: Varmentioning

confidence: 99%

Expansionary fiscal consolidations in Europe: new evidence

Afonso

¹

2008

Applied Economics Letters

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“…See, for instance, Feldstein (), Giavazzi and Pagano (), Alesina and Ardagna (, ), Miller and Russek (), Castro (, ), Heim (, ), and Afonso and Jalles ().…”

mentioning

confidence: 99%

How Does Fiscal Consolidation Impact on Income Inequality?

Agnello

¹

,

Sousa

²

2012

Review of Income and Wealth

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The authors wish to thank Prof. Sushanta Mallick and to participants to a seminar at the Banque De France for helpful comments. The opinions expressed herein are those of the authors and do not necessarily reflect those of the Banque de France. AbstractIn this paper, we assess the impact of fiscal consolidation on income inequality. Using a panel of 18 industrialized countries from 1978 to 2009, we find that income inequality significantly rises during periods of fiscal consolidation. In addition, while fiscal policy that is driven by spending cuts seems to be detrimental for income distribution, tax hikes seem to have an equalizing effect. We also show that the size of the fiscal consolidation program (in percentage of GDP) has an impact on income inequality. In particular, when consolidation plans represent a small share of GDP, the income gap widens, suggesting that the burden associated with the effort affects disproportionately households at the bottom of the income distribution. Considering the linkages between banking crises and fiscal consolidation, we find that the effect on the income gap is amplified when fiscal adjustments take place after the resolution of such financial turmoils. Similarly, fiscal consolidation programs combined with inflation are likely to increase inequality and the effects of fiscal adjustments on inequality are amplified during periods of relatively low growth. Our results also provide support for a nonlinear relationship between inequality and income and corroborate the idea that trade can promote a more equal distribution of income.Keywords: Fiscal consolidation, income inequality, Kuznets curve. JEL: E62, E64, D63. RésuméDans cet article, nous évaluons l'impact de la consolidation budgétaire sur l'inégalité des revenus. Utilisant un panel de 18 pays industrialisés de 1978 à 2009, nous constatons que l'inégalité des revenus augmente de façon significative pendant les périodes de consolidation budgétaire. En outre, alors qu'une consolidation axée sur la réduction des dépenses semble être préjudiciable pour la distribution des revenus, des hausses d'impôts semblent avoir un effet égalisateur. Nous montrons aussi que la taille du programme de consolidation budgétaire (en pourcentage du PIB) a un impact sur l'inégalité des revenus. En particulier, lorsque les plans de consolidation ne représentent qu'une faible part du PIB, l'écart de revenu se creuse, ce qui suggère que le fardeau associé à l'effort affecte de manière disproportionnée les ménages au bas de la distribution des revenus. Considérant les liens entre crises bancaires et l'assainissement budgétaire, nous constatons que l'effet sur l'écart de revenu est amplifié lorsque des ajustements budgétaires ont lieu après la résolution de ces tourmentes financières. De même, les programmes d'assainissement budgétaire accompagnés d'inflation forte sont susceptibles d'accroître les inégalités et les effets des ajustements budgétaires sur l'inégalité sont amplifiés durant les périodes de croissance relativement faible. Nos résulta...

show abstract

The Relationship Between Large Fiscal Adjustments and Short‐term Output Growth Under Alternative Fiscal Policy Regimes

Cited by 24 publications

References 31 publications

How Does Fiscal Consolidation Impact on Income Inequality?

How Does Fiscal Consolidation Impact on Income Inequality?

Expansionary fiscal consolidations in Europe: new evidence

How Does Fiscal Consolidation Impact on Income Inequality?

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