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Symposium 2015

The Design of Fiscal Consolidation Plans

The Challenge

In the aftermath of the global financial crisis and the Great Recession, many countries are facing substantial deficits and growing debt. As analyzed in the 16th Geneva Report on the World Economy, the global debt-GDP ratio continues to grow, while growth and inflation remain low, raising concerns about the dangers posed by new crises. This situation spurs the need to consolidate public finances in order to bring down debt-GDP ratios. When setting up specific fiscal consolidation plans in order to achieve this, policymakers can generally choose from a wide range of possible fiscal instruments. The aim of this session is to discuss how consolidation plans should be designed to bring debt-GDP ratios down, while minimizing short-run social and economic costs.

This GES session addresses the following questions: How can the short-run economic and social costs of consolidation be minimized? Which mix of fiscal instruments should national governments use in order to consolidate, and over which time horizon? Do fiscal rules help to make consolidation plans more credible?

This session is organized by Claire Reicher, Kiel Institute for the World Economy. Please check out the tabs below for additional facts and information.

    Solutions

    Solution
    Symposium 2015

    Reconcile Fiscal Consolidation with Economic Growth and Social Inclusion

    Reconcile Fiscal Consolidation with Economic Growth and Social Inclusion

    Reconcile Fiscal Consolidation with Economic Growth and Social Inclusion

    Solution
    Symposium 2015

    The Answer to High Debt Is Growth

    The Answer to High Debt Is Growth

    The Answer to High Debt Is Growth

    Solution
    Symposium 2015

    On the Design of Fiscal Consolidation Plans

    On the Design of Fiscal Consolidation Plans

    On the Design of Fiscal Consolidation Plans

    Background Paper

    Background Paper
    Symposium 2015

    The Design of Fiscal Consolidation Plans

    Polity, Academia, Business, Civil Society

    Virtual Library

    Virtual Library File
    Symposium 2015

    Large changes in fiscal policy: Taxes versus spending

    In this paper the authors empirically analyze episodes of large changes in fiscal policy in OECD countries from 1970-2007. With respect to the issue of fiscal consolidation they find that: Spending c ...


    In this paper the authors empirically analyze episodes of large changes in fiscal policy in OECD countries from 1970-2007. With respect to the issue of fiscal consolidation they find that:

      1. Spending cuts are more likely to reduce deficits and debt-GDP ratios than tax increases.
      2. Fiscal adjustments on the spending side are less like to create recessions than adjustments on the tax side
      Virtual Library File
      Symposium 2015

      The ”austerity myth”: Gain without pain?

      In this paper the author accesses the effects of fiscal consolidation by presenting four detailed country case studies (Denmark, Ireland, Finland and Sweden). In all four countries consolidation was a ...


      In this paper the author accesses the effects of fiscal consolidation by presenting four detailed country case studies (Denmark, Ireland, Finland and Sweden). In all four countries consolidation was associated with expansions. The author argues that at least two important factors which contribute to this development:

      1. The exchange rate regime, and
      2. Changes in price competitiveness.

      In addition he discusses the main drivers of the expansion, decomposed by changes to domestic demand vs. export-driven growth.

      Virtual Library File
      Symposium 2015

      Fiscal Consolidation Strategy

      In this paper the authors analyze the effects of fiscal consolidation using a structural macroeconomic model. As the effects of fiscal consolidation are hard to identify empirically, this paper is a w ...


      In this paper the authors analyze the effects of fiscal consolidation using a structural macroeconomic model. As the effects of fiscal consolidation are hard to identify empirically, this paper is a well suited to complement the two aforementioned empirical papers. The main finding is that government-spending-based consolidation has positive effects on output, both in the short run and in the long run. This occurs because:

      1. Lower levels of government spending in the future, compared to the baseline, imply lower tax rates, which provide better incentives and hence stimulate employment.
      2. The expectation of reduced government spending in the future lowers interest rates, which stimulates demand in a manner which offsets the decline in government spending in the short run.
      3. The lower interest rate reduces the exchange rate thereby increasing net exports, also offsetting the decline in government spending.
      Virtual Library File
      Symposium 2015

      Fiscal Rules: Theoretical Issues and Historical Experiences

      In this paper the author discusses the role of institutions (e.g. fiscal rules) in the context of fiscal (in)discipline. The main conclusion can be summarized as follows: Rules are unlikely to exist ...

      In this paper the author discusses the role of institutions (e.g. fiscal rules) in the context of fiscal (in)discipline. The main conclusion can be summarized as follows:

      1. Rules are unlikely to exist unless they come with supporting institutions.
      2. Fiscal institutions are neither necessary nor sufficient to achieve fiscal discipline, but they help.
      3. Institutions must bind the policymakers without violating the democratic requirement that elected officials have the power to decide on budgets, effective arrangements are those that give institutions the authority to apply legal rules or to act as official watchdogs.
      Virtual Library File
      Symposium 2015

      Fiscal consolidation: How much, how fast and by what means?

      This paper provides a detailed analysis of fiscal gaps for advanced economies.


      This paper provides a detailed analysis of fiscal gaps for advanced economies.