Baldacci, E., Gupta, S., Mulas-Granados, C. (2014) “Fiscal adjustment and growth: Beware of the credit constraints“, VoxEU Organisation, 31 March.
The recent debate on the link between austerity and growth has focused on the short run. This column discusses recent research into the link between fiscal consolidation and medium-term growth under different financial conditions. If credit is not available to consumers and investors, private demand is less able to compensate for cutbacks in public demand, so large spending cuts can have a negative effect on growth. Difficult financial conditions probably explain why fiscal adjustments that worked in the 1990s have not produced similar beneficial effects on growth in recent years.
In the aftermath of the recent financial crisis, the discussion of the effects of fiscal adjustment on economic growth has intensified. While some scholars have focused on the characteristics of the fiscal consolidation needed to bring public debt down from historically high levels, others have examined the effects of alternative strategies on economic performance. The VoxEU debate aptly covered in “Has Austerity Gone Too Far?” (Corsetti 2012) sums up the conflicting positions. Most scholars have delved into different dimensions of fiscal adjustments, including their timing, composition, and duration. The empirical analysis of the growth effects of these policies, however, has largely concentrated on the short run. This has left unanswered the question of how fiscal consolidations affect growth over the longer term.
Relevant posts:
- Baldacci, Ε., Gupta, S. & Mulas-Granados, C. (2013) “Debt Reduction, Fiscal Adjustment, and Growth in Credit-Constrained Economies”, International Monetary Fund, Working Paper No.13/238, 22 November.
- Roaf, J. (2013) “Assessing the Impact and Phasing of Multi-year Fiscal Adjustment: A General Framework“, IMF Working Paper, N.,13/182.
- Wickens, M. & Polito, V. (2013) “A fiscal perspective on EU sovereign credit ratings: Did the credit-rating agencies get them right?”, VoxEU Οrganisation, 30 October.