The growth impact of discretionary fiscal policy measures

Maria Grazia Attinasi and Alexander Klemm

No 1697, Working Paper Series from European Central Bank

Abstract: This paper looks at the impact of discretionary fiscal policy on economic growth for a sample of 18 EU countries over the period 1998-2011. The main novelty of this paper is the use, on the revenue side, of a dataset of fiscal measures based on the yield of actual legislative and budgetary measures, rather than approximations, such as changes in cyclically-adjusted variables. Using static and dynamic panel data techniques, we find that fiscal consolidation can be a drag on economic growth in the short-term, although some specific budget categories are not found to be statistically significant. In general, the results also indicate that expenditure-based adjustment tends to be less harmful than revenue-based adjustment. Among expenditure cuts, reductions in government investment and consumption are found to be growth reducing. Among revenues, indirect tax increases are found to have a particularly strong negative impact. Dynamic specifications suggest that consolidation reduces growth mainly in the year of fiscal adjustment, while future growth rates are affected only through the usual time persistence. Nonlinear specifications indicate that spreading out consolidation reduces the negative impact on growth, but only very slightly and in the absence of financial market pressures and/or fiscal sustainability considerations. Additionally, front-loading fiscal consolidation appears to be less detrimental for growth when it is based on expenditure cuts rather than tax increases JEL Classification: H20, H30, H50, C33

Keywords: fiscal multipliers; fiscal policy and growth; panel data. (search for similar items in EconPapers)
Date: 2014-07
New Economics Papers: this item is included in nep-eec, nep-fdg and nep-pbe
Note: 930374
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: The growth impact of discretionary fiscal policy measures (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20141697

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