Fiscal adjustment

Abstract: Fiscal adjustments Fiscal expansions and adjustments in OECD countries In several countries policy-makers are striving to improve the budget balance, which can be done either by raising taxes or by cutting expenditures. But the two strategies are not equivalent. Drawing on the experience of twenty OECD countries after 1960, this article shows that large fiscal expansions typically occur through increases in expenditure, while large fiscal adjustments rely on tax increases. It also appears that permanent improvements in the fiscal balance crucially differ from fiscal adjustments that lead to a temporary improvement and are reversed in a short time. Permanent improvements are implemented mainly via cuts in two types of expenditure: transfer programmes and compensation of government employees. Temporary improvements are carried out almost exclusively via tax increases. Finally, coalition governments may often try to make substantial fiscal adjustments, but they are much less likely than others to carry out the two types of expenditure cut that make an adjustment successful. These findings convey a clear message: the composition of a fiscal adjustment is of fundamental importance in determining its success. A fiscal adjustment cannot have long-lasting effects unless it tackles two expenditures – government employment and social programmes – often regarded as untouchable by policy-makers and their advisers. — Alberto Alesina and Roberto Perotti

Abstract: Fiscal adjustments Why they can be expansionary This paper examines the evidence on fiscal adjustments in OECD countries from the early 1960s to today. The results shed light on the recently observed phenomenon of fiscal tightening that produces (non‐Keynesian) expansionary effects. One interpretation is that a serious fiscal tightening increases demand. Wealth rises when future tax burdens decline, and when interest rates decline credibility is restored and inflation or default risks abate. Both consumption and investment rise. For this effect to produce an expansion, the tightening must be sizeable and occur after a period of stress when the budget is quickly deteriorating and public debt is building up. Another interpretation emphasizes the supply side. Typically, a fiscal consolidation based on tax increases is short‐lived. To be long lasting, it must include cuts in public employment, transfers and government wages. To be politically possible, such a policy must be supported by trade unions. These measures result in more efficient labour markets and boost the supply side. Based both on statistical evidence and on a detailed analysis of ten cases of major fiscal adjustment, this article provides cautious support to the supply‐side view, without denying a more limited role for the demand‐side channel. — Alberto Alesina and Silvia Ardagna

Abstract: This paper studies how the composition of fiscal adjustments influences their likelihood of “success”, defined as a long lasting deficit reduction, and their macroeconomic consequences. We find that fiscal adjustments which rely primarily on spending cuts on transfers and the government wage bill have a better chance of being successful and are expansionary. On the contrary fiscal adjustments which rely primarily on tax increases and cuts in public investment tend not to last and are contractionary. We discuss alterative explanations for these findings by studying both a full sample of OECD countries and by focusing on three case studies: Denmark, Ireland and Italy.

Abstract: The book has a comprehensive introduction and two main parts. Part I presents the conceptual underpinnings for the Bank's thinking on pension systems and reforms, including structure of Bank lending in this area. Part II highlights key design and implementation issues where it signals areas of confidence and areas for further research and experience, and includes a section on regional reform experiences, including Latin American and Europe and Central Asia.