Fiscal consolidations: announcements and reality - CEPR European Economic Policy RPN

The Centre for Economic Policy Research (CEPR) Research Policy Network (RPN) European Economic Policy organised the first of its webinar series in collaboration with the European and Monetary Union (EMU) Laboratory of the European University Institute (EUI), on

Fiscal consolidations:
announcements and reality

held online on
Wednesday, 18 September 2024
03:00PM - 04:00 PM (CEST)
via Zoom

With paper's authors:
Roberto Perotti (Bocconi University, IGIER, and CEPR)
Luca Sala (Bocconi University, IGIER and Baffi Carefin)

Organisers and Moderators:
Laura Bottazzi (Bologna University and CEPR)
Giancarlo Corsetti (EUI and CEPR)

Abstract: In many EA countries, high debt levels point to the need for corrective measures to ensure fiscal sustainability. What makes a successful fiscal consolidation? A widespread view among economists is shaped by a large body of literature, arguing that (a) consolidations based on announcements of tax increases tend to lead to declines in GDP, as opposed to (b) consolidations based on announcements of expenditure cuts, that are associated with almost no change in GDP. In the webinar, Roberto Perotti and Luca Sala discussed whether this view can offer a reliable guidance to policy design. In a recent paper, Perotti and Sala reconsider the evidence focusing on the actual (as opposed to the announced) spending and revenues measures. The relevance of their findings cannot be over-estimated: spending does not decline in consolidations that are classified (on the basis of announcements) as "expenditure-based", but does decline, and by a large amount, in “tax-based” consolidations. Most strikingly, actual discretionary revenues move little in either type of consolidations. Implications for policy design are the opposite relative to the “consensus view”.