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When austerity pays off: fiscal consolidations and public sector efficiency in emerging markets

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  • Alves, José
  • Jalles, João Tovar
  • Menescal, Lucas

Abstract

This paper explores the impact of fiscal consolidations on public sector efficiency in emerging market economies. We examine how efforts to reduce government deficits and debt influence the efficiency of public sector operations. Using the local projections method on a panel of 41 emerging markets from 1997 to 2019, we estimate the dynamic effects of consolidation shocks. Results indicate that expenditure-based consolidations improve public sector efficiency, especially when consolidations are large, occur during downturns, or when initial debt levels are high. Tax-based consolidations show no significant impact. These findings suggest that well-structured expenditure cuts can enhance operational efficiency, making fiscal adjustments more effective. Our paper contributes to the literature on fiscal policy by highlighting the role of consolidation composition in shaping efficiency outcomes. The results provide valuable insights for policymakers designing fiscal strategies in emerging economies, balancing fiscal sustainability with efficient public service delivery.

Suggested Citation

  • Alves, José & Jalles, João Tovar & Menescal, Lucas, 2025. "When austerity pays off: fiscal consolidations and public sector efficiency in emerging markets," Journal of International Money and Finance, Elsevier, vol. 157(C).
    • Handle: RePEc:eee:jimfin:v:157:y:2025:i:c:s0261560625001159
    DOI: 10.1016/j.jimonfin.2025.103380
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    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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