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The Composition of Fiscal Consolidation Matters; Policy Simulations for Hungary

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  • Alejandro D Guerson

Abstract

This paper evaluates policy alternatives to achieve permanent fiscal consolidation in Hungary, based on a general equilibrium calibration. The main finding is that the composition of the consolidation, as determined by the mix of revenue and expenditure measures, has important implications for growth, employment, investment, and other key macroeconomic variables. A reduction in current expenditures yields the smallest GDP contraction in the short term and can increase output in the long term by stimulating labor participation and private investment. On the other end of the spectrum, a consolidation of government investment and corporate taxes are the most costly, as disincentives for private investment result in protracted declines in GDP that compound over time to GDP losses that are multiple times the initial size of the consolidation.

Suggested Citation

  • Alejandro D Guerson, 2013. "The Composition of Fiscal Consolidation Matters; Policy Simulations for Hungary," IMF Working Papers 13/207, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:13/207
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    References listed on IDEAS

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    Cited by:

    1. DUMITRESCU, Bogdan Andrei, 2015. "An Optimality Assessment Of The Fiscal Consolidation Process Initiated By Romania In 2010," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 19(1), pages 8-20.

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