Economic Expansions and Fiscal Contractions: International Evidence and the 1982 Danish Stabilization

Consolidation of government fiscal positions is on the policy agenda of many countries. The necessity of improved fiscal positions has been evident for a number of years because of a pattern of large public sector deficits and a corresponding rise in public indebtedness. For a number of European countries, the desire to meet the convergence criteria of the Maastricht Treaty to qualify for the final stage of EMU sets national budgetary targets (public deficits not to exceed 3 per cent of GDP and public debt not to exceed 60 per cent of GDP) that entail substantial contractions in fiscal policy. Concerns over the negative output and employment consequences of fiscal consolidation, at least in the short term, have reinforced political opposition to specific adjustment measures in many cases. The call for early elections in France in May and June 1997, for example, were motivated in part by the government’s desire to receive a mandate before proceeding further with fiscal austerity measures, widely anticipated to adversely affect output and employment, in order to meet the converge criteria of the Maastricht Treaty.