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Back to fiscal consolidation in Europe and its dual tradeoff : now of later, through spending cuts or tax hikes

Listed author(s):
  • Christophe Blot

    (OFCE - Sciencespo Auhor-Email :christophe.blot@sciencespo.fr)

  • Jerôme Creel

    ()

    (OFCE-Sciencespo & ESCP)

  • Bruno Ducoudré

    (OFCE-Sciencespo)

  • Xavier Timeau

    (OFCE-Sciencespo)

The European consolidation process has raised a few questions. The most frequent one has been how large are the costs of consolidation and has the Eurozone fiscal stance improved or achieved debt sustainability? Second, do these costs and sustainability depend on the composition (tax vs. spending) of the consolidation process? Third, do risk premia matter? Fourth, which of the two following strategies, backloading vs. frontloading, is superior to the other? The aim of the paper is toshed light on these questions using a multi-country reduced-form model. It considers explicitly that the Eurozone member states arefacing a dual trade-off, first between labor market outcomes of consolidation and public debt dynamics and, second, between reducing public expenditures and increasing taxes.The main conclusion is that a tax-based backloadedconsolidation is superior to all other strategies, be they spending-based or frontloaded, or both. Introducing risk premia endogenously does not alter the conclus.

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File URL: http://www.ofce.sciences-po.fr/pdf/dtravail/WP2015-11.pdf
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Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2015-11.

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Date of creation: Mar 2015
Handle: RePEc:fce:doctra:1511
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