Expenditure Cuts vs. Tax Hikes: Economic Effects of Municipal Consolidation Strategies

Zohal Hessami, Maximilian Thomas and Georg U. Thunecke

Working Papers from Max Planck Institute for Tax Law and Public Finance

Abstract: This paper estimates the short- and medium-term causal effects of austerity on local fiscal, economic, and political outcomes. We study a 2013 austerity program in Hesse, Germany, coding 2,900 consolidation measures across 86 municipalities and comparing them with 4,630 untreated municipalities using synthetic difference- in-differences. Austerity improves fiscal outcomes through tax increases and spending cuts, but at sizable economic cost: treated municipalities experience slower firm growth, lower salaries, and lower employment. Tax-based adjustment erodes the business tax base and employment, implying higher efficiency costs than expenditure-based consolidation. Political costs arise mainly when consolidation relies heavily on one fiscal instrument.

Keywords: austerity; tax hikes; expenditure cuts; local public finances; consolidation strategies (search for similar items in EconPapers)
JEL-codes: H39 H72 H81 R51 (search for similar items in EconPapers)
Pages: 57
Date: 2026-05-18
New Economics Papers: this item is included in nep-pub
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http://www.tax.mpg.de/RePEc/mpi/wpaper/TAX-MPG-RPS-2026-04.pdf Full text (original version) (application/pdf)

Related works:
Working Paper: Expenditure Cuts vs. Tax Hikes: Economic Effects of Municipal Consolidation Strategies (2026)
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Persistent link: https://EconPapers.repec.org/RePEc:mpi:wpaper:tax-mpg-rps-2026-04

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