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Self-defeating austerity? Assessing the impact of a fiscal consolidation on unemployment

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  • João Carlos Lopes
  • João Ferreira do Amaral

Abstract

The great recession of 2008/2009 had a huge impact on unemployment and public finances in most advanced countries, and these impacts were magnified in the southern Euro area by the sovereign debt crisis of 2010/2011. The fiscal consolidation imposed by the European Union on highly indebted countries was based on the assumptions of so-called expansionary austerity. However, the reality so far provides proof to the contrary, and the results outlined in this article support the opposing view of a self-defeating austerity. Based on a model of the input–output relations of the productive system, an unemployment rate/budget balance trade-off equation is derived, as well as the impact of a strong fiscal consolidation based on social transfers and the notion of a neutral budget balance. An application to the Portuguese case confirms the huge costs of a strong fiscal consolidation, both in terms of unemployment and social policy regress. The conclusion is that too much consolidation in anyone year makes consolidation more difficult in the following year.

Suggested Citation

  • João Carlos Lopes & João Ferreira do Amaral, 2017. "Self-defeating austerity? Assessing the impact of a fiscal consolidation on unemployment," The Economic and Labour Relations Review, , vol. 28(1), pages 77-90, March.
    • Handle: RePEc:sae:ecolab:v:28:y:2017:i:1:p:77-90
    DOI: 10.1177/1035304616689658
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    1. Stefano di Bucchianico, 2019. "A bit of Keynesian debt-to-GDP arithmetic for deficit-capped countries," Bulletin of Political Economy, Bulletin of Political Economy, vol. 13(1), pages 55-83, June.

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    More about this item

    Keywords

    Austerity; fiscal consolidation; input–output analysis; Portugal; self-defeating austerity; unemployment;
    All these keywords.

    JEL classification:

    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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