The Composition of Fiscal Consolidation Matters: Policy Simulations for Hungary
IMF Working Papers, October 4, 2013
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- The Composition of Fiscal Consolidation Matters: Policy Simulations for Hungary
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Bibliographic details
- Authors: Alejandro D Guerson
- Published: October 4, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484305225.001
Summary of analysis and main finding
- 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.
Key findings and macroeconomic impacts
- Reduction in current expenditures:
- Smallest short-term GDP contraction.
- Potential long-term increase in output via higher labor participation and private investment.
- Consolidation of government investment:
- Large negative effect on private investment.
- Protracted declines in GDP that compound over time.
- Consolidation via corporate taxes:
- Creates disincentives for private investment.
- Leads to prolonged GDP declines and cumulative losses multiple times the initial consolidation amount.
Policy implications and recommendations (implicit in results)
- The composition of fiscal consolidation matters critically for macroeconomic outcomes.
- Policy choices that preserve or limit cuts to government investment and avoid raising corporate taxes are likely to reduce the long-term economic cost of consolidation.
- Measures focused on reducing current expenditures are more favorable in minimizing short-term output losses and can support long-term growth through labor market and investment channels.
Subjects and keywords (as provided)
- Subject: Consumption, Fiscal consolidation, Fiscal policy, Government consumption, Labor, National accounts, Public debt
- Keywords: adjustment cost, Consumption, DSGE models, expenditure category, financial accelerator, fiscal consolidation, GDP, Global, goods, goods producer, Government consumption, Hungary, import agent, inertial consumption dynamics, investment, investment goods output, liquidity constrained households, macro-financial linkages, output, overlapping generations households, WP