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Fiscal Adjustments and the Short-Term Trade-Off between economic growth and equality

  • Carlos Mulas-Granados

    ()

    (Oficina Económica del Presidente del Gobierno)

This article examines the short-term economic impact of alternative fiscal adjustment strategies, with an especial focus on their effect on economic growth and income distribution Based on a sample of 53 adjustment episodes occurred in the fifteen EU Member States between 1960-2000, this article shows that different strategies of fiscal adjustment bring about different economic consequences. Expenditure-based adjustments that are preceded by bad economic and fiscal initial conditions, that are accompanied by a devaluation, and that succeed in cutting the least productive expenditures of the budget, are likely to have anti-Keynesian effects and to be expansionary. Nevertheless, they do so at the expense of increasing income inequality. The opposite is true for revenue-based consolidations. The nineties epitomize the story of expansionary fiscal consolidations via strong wealth and credibility effects, but also the rebirth of the trade-off between growth and equality, mediated by fiscal policy.

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Article provided by IEF in its journal Hacienda Pública Española/Revista de Economía Pública.

Volume (Year): 172 (2005)
Issue (Month): 1 (June)
Pages: 61-92

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Handle: RePEc:hpe:journl:y:2005:v:172:i:1:p:61-92
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