Fiscal Austerity Measures: Spending Cuts vs. Tax Increases

Gerhard Glomm (), Juergen Jung and Chung Tran

ANU Working Papers in Economics and Econometrics from Australian National University, College of Business and Economics, School of Economics

Abstract: We study the macroeconomic and welfare effects of decumulating government debt in an overlapping generations model with skill heterogeneity and productive and non-productive government programs. Our results are: First, in the small open economy model calibrated to Greece, the spending-based austerity reform dominates the tax-based reform with respect to income effects but not with respect to the welfare effect. A mixed reform combining the tax-based and spending-based measures results in the largest welfare effects of up to 1.8 percent of pre-reform consumption. Second, the welfare effects vary significantly along the transition to the post reform steady state, depending not only on fiscal austerity measures, but also on skill types, working sectors and generations. When consumption taxes adjust the aggregate welfare effects are positive but the current old and middle age generations experience welfare losses while current young workers and future generations are beneficiaries. Third, interactions between fiscal distortions and the risk premium as well as accessibility to international capital markets strongly influence the effects of fiscal austerity. Larger growth and welfare effects are observed when the risk premium is larger than zero and when access to international capital markets is restricted.

JEL-codes: E21 E63 H55 J26 J45 (search for similar items in EconPapers)
Pages: 47 Pages
Date: 2012-11
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: FISCAL AUSTERITY MEASURES: SPENDING CUTS VS. TAX INCREASES (2018)
Working Paper: Fiscal Austerity Measures: Spending Cuts vs. Tax Increases (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:acb:cbeeco:2012-594

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