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Fiscal Austerity Measures: Spending Cuts vs. Tax Increases

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Listed author(s):
  • Gerhard Glomm

    ()

  • Juergen Jung

    ()

  • Chung Tran

    ()

Abstract

We study the macroeconomic and welfare effects of decumulating government debt in an overlapping generations model with skill heterogeneity and productive and non-productive government programs. Our results are: First, in the small open economy model calibrated to Greece, the spending-based austerity reform dominates the tax-based reform with respect to income effects but not with respect to the welfare effect. A mixed reform combining the tax-based and spending-based measures results in the largest welfare effects of up to 1.8 percent of pre-reform consumption. Second, the welfare effects vary significantly along the transition to the post reform steady state, depending not only on fiscal austerity measures, but also on skill types, working sectors and generations. When consumption taxes adjust the aggregate welfare effects are positive but the current old and middle age generations experience welfare losses while current young workers and future generations are beneficiaries. Third, interactions between fiscal distortions and the risk premium as well as accessibility to international capital markets strongly influence the effects of fiscal austerity. Larger growth and welfare effects are observed when the risk premium is larger than zero and when access to international capital markets is restricted.

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File URL: https://www.cbe.anu.edu.au/researchpapers/econ/wp594.pdf
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Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANU Working Papers in Economics and Econometrics with number 2012-594.

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Length: 47 Pages
Date of creation: Nov 2012
Handle: RePEc:acb:cbeeco:2012-594
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Find related papers by JEL classification:
  • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
  • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
  • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
  • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
  • J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets

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Cited by:

  1. Gerhard Glomm & Juergen Jung, 2015. "A Macroeconomic Analysis Of Energy Subsidies In A Small Open Economy," Economic Inquiry, Western Economic Association International, vol. 53(4), pages 1783-1806, October.
  2. Salvatore Dell'Erba & Marcos Poplawski-Ribeiro & Ksenia Koloskova, 2014. "Medium-Term Fiscal Multipliers during Protracted Recessions," IMF Working Papers 14/213, International Monetary Fund.
  3. George Kudrna & Chung Tran, 2015. "Budget Repair Measures: Tough Choices for Australia's Future," ANU Working Papers in Economics and Econometrics 2015-628, Australian National University, College of Business and Economics, School of Economics.

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