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

Listed author(s):
  • Christophe Blot

    (Observatoire français des conjonctures économiques)

  • Jérôme Creel

    (Observatoire français des conjonctures économiques)

  • Bruno Ducoudre

    (Observatoire français des conjonctures économiques)

  • Xavier Timbeau

    (Observatoire français des conjonctures économiques)

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 to shed light on these questions using a multi-country reduced-form model. It considers explicitly that the Eurozone member states are facing 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 backloaded consolidation is superior to all other strategies, be they spending-based or frontloaded, or both. Introducing risk premia endogenously does not alter the conclusion.

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File URL: http://spire.sciencespo.fr/hdl:/2441/6018jmm8rk9oroimutg7hhiu3f/resources/wp2015-11-1.pdf
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Paper provided by Sciences Po in its series Sciences Po publications with number 2015-11.

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Date of creation: Mar 2015
Handle: RePEc:spo:wpmain:info:hdl:2441/6018jmm8rk9oroimutg7hhiu3f
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