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Effects of fiscal consolidation envisaged in the 2013 Stability and Convergence Programmes on public debt dynamics in EU Member States

  • Katia Berti
  • Francisco de Castro
  • Matteo Salto

This paper presents a simple analysis of the public debt-to-GDP ratio responses to fiscal consolidation efforts envisaged in the 2013 Stability and Convergence Programmes presented by EU Member States. In this paper we assess the response of the debt-to-GDP ratio to the fiscal consolidation efforts envisaged in the 2013 Stability and Convergence Programmes (SCPs) presented by EU Member States, under different assumptions on the underlying fiscal multipliers. The effects of fiscal consolidation are assessed against a counterfactual no-consolidation scenario, in which the structural primary balance is kept constant at 2012 value. We show that large fiscal multipliers lead to temporary increases in the debt ratio following consolidation, relative to the no-consolidation baseline. However, for high but plausible values of the multipliers, such counter-intuitive effects are relatively short-lived (maximum three years from the beginning of the consolidation programme). Increases in the debt ratio are anyway more protracted if financial markets react myopically to consolidation efforts (demanding higher yields). Despite the possible negative short-term effects, consolidation is needed as the debt dynamic in absence of policy intervention is in many cases quite steep and further debt increases would raise the likelihood of a self-defeating dynamics in the future. Based on our simple analytical framework, short-term increases in the debt ratio (relative to baseline) following consolidation could take place for a group of countries expected to experience high fiscal multipliers, including Belgium, Cyprus, France, Greece, Italy, Ireland, Portugal, Slovenia and Spain.

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File URL: http://ec.europa.eu/economy_finance/publications/economic_paper/2013/ecp504_en.htm
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Paper provided by Directorate General Economic and Financial Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 504.

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Length: 34 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:euf:ecopap:0504
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