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Symposium 2015

Virtual Library File - Large changes in fiscal policy: Taxes versus spending

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, th ...

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.


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