The Trade-Off between Growth & Equality and the Economic Impact of Alternative Fiscal Adjustment Strategies in the EU

Carlos Mulas-Granados

No 20, European Economy Group Working Papers from European Economy Group

Abstract: This paper examines the economic impact of alternative budgetary compositions with an special focus on the effect that different fiscal adjustment strategies have on growth and equality. Based on a sample of 53 adjustment episodes occurred in the fifteen EU Member States between 1960-2000, this paper shows that different strategies of fiscal adjustment bring about different economic consequences. Expenditure-based adjustments that are preceded by bad economic and fiscal initial conditions, that are accompanied by a devaluation, and that succeed in cutting the least productive expenditures of the budget, are likely to have anti-Keynesian effects and to be expansionary. Nevertheless, they do so at the expense of increasing income inequality. The opposite is true for revenue-based consolidations. The nineties epitomize the story of expansionary fiscal consolidations via strong wealth and credibility effects, but also the rebirth of the trade-off between growth and equality, mediated by fiscal policy.

Pages: 43 pages
Date: 2003
New Economics Papers: this item is included in nep-eec and nep-mac
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