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Discussion Paper Details

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Title: Effects of Austerity: Expenditure- and Tax-based Approaches

Author(s): Alberto F Alesina, Carlo A. Favero and Francesco Giavazzi

Publication Date: March 2019

Keyword(s): austerity, fiscal adjustment plans and output growth

Programme Area(s): International Macroeconomics and Finance

Abstract: We review the debate surrounding the macroeconomic effects of deficit reduction policies (austerity). The discussion about "austerity" in general has distracted commentators and policymakers from a very important result, namely the enormous difference, on average, between expenditure- and tax-based austerity plans. Spending-based austerity plans are remarkably less costly than tax-based plans. The former have on average a close to zero effect on output and lead to a reduction of the debt over GDP ratio. Tax-based plans have the opposite effect and cause large and long lasting recessions. These results also apply to the recent episodes of European austerity which in this respect were not especially different from previous cases.

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Bibliographic Reference

Alesina, A, Favero, C and Giavazzi, F. 2019. 'Effects of Austerity: Expenditure- and Tax-based Approaches'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13565