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Effects of Austerity: Expenditure- and Tax-Based Approaches

Alberto Alesina, Carlo Favero () and Francesco Giavazzi

Journal of Economic Perspectives, 2019, vol. 33, issue 2, 141-62

Abstract: 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/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.

JEL-codes: E23 E32 E62 H20 H50 H62 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/jep.33.2.141
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