DP13565 Effects of Austerity: Expenditure- and Tax-based Approaches

Author(s): Alberto F Alesina, Carlo A. Favero, Francesco Giavazzi
Publication Date: March 2019
Date Revised: March 2019
Keyword(s): austerity, fiscal adjustment plans, output growth
JEL(s): E60, E62
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13565

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.