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Uneven cuts: Fiscal consolidation and the composition of government spending

Author

Listed:
  • Philipp Heimberger

    (The Vienna Institute for International Economic Studies, wiiw)

  • Anna Matzner

    (The Vienna Institute for International Economic Studies, wiiw)

  • Bernhard Schütz

    (The Vienna Institute for International Economic Studies, wiiw)

Abstract

We present new evidence on the dynamic effects of fiscal consolidation shocks across different components of government spending. Based on data for 16 OECD countries over the 1995-2020 period, we use an instrumental variable approach that isolates exogenous fiscal tightening motivated by deficit reduction in a local projection framework. We find that fiscal consolidation shocks lead to sizable and persistent declines in public investment in the short to medium term, whereas reductions in government consumption are substantially smaller. Real expenditures on health, education, social protection, and environmental protection fall in response to fiscal tightening, albeit to varying degrees. We further show that the dampening effects of fiscal adjustment across spending categories depend on the macro-fiscal and political environment.

Suggested Citation

  • Philipp Heimberger & Anna Matzner & Bernhard Schütz, 2026. "Uneven cuts: Fiscal consolidation and the composition of government spending," wiiw Working Papers 281, The Vienna Institute for International Economic Studies, wiiw.
    • Handle: RePEc:wii:wpaper:281
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    File URL: https://wiiw.ac.at/uneven-cuts-fiscal-consolidation-and-the-composition-of-government-spending-dlp-7720.pdf
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    Keywords

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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