Self-Defeating Austerity? Assessing the Impact of Fiscal Consolidations on Unemployment

João Ferreira do Amaral and João Lopes ()

No 2016/13, Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa

Abstract: The great recession of 2008/2009 has had a huge impact on unemployment and public finances in most advanced countries, and these impacts were magnified in the southern Euro area countries by the sovereign debt crisis of 2010/2011. The fiscal consolidation imposed by the European Union on highly indebted countries was based on the assumptions of the so-called expansionary austerity. However, the reality so far shows proof to the contrary, and the results of this paper support the opposing view of a selfdefeating austerity. Based on the input-output relations of the productive system, an unemployment rate/budget balance trade-off equation is derived, as well as the impact of a strong fiscal consolidation based on social transfers and the notion of neutral budget balance. An application to the Portuguese case confirms the huge costs of a strong fiscal consolidation, both in terms of unemployment and social policy regress, and it allows one to conclude that too much consolidation in one year makes consolidation more difficult in the following year. Key Words : Self-defeating austerity; Fiscal consolidation; Unemployment; Input-output analysis; Portugal

JEL-codes: C67 D57 E23 E62 (search for similar items in EconPapers)
Date: 2016-07
New Economics Papers: this item is included in nep-eec and nep-mac
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Citations: View citations in EconPapers (2)

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