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Back to fiscal consolidation in Europe and its dual tradeoff: now or later, through spending cuts or tax hikes ?

Christophe Blot (), Jerome Creel (), Bruno Ducoudré and Xavier Timbeau ()

No 2015-11, Sciences Po publications from Sciences Po

Abstract: The European consolidation process has raised a few questions. The most frequent one has been how large are the costs of consolidation and has the Eurozone fiscal stance improved or achieved debt sustainability? Second, do these costs and sustainability depend on the composition (tax vs. spending) of the consolidation process? Third, do risk premia matter? Fourth, which of the two following strategies, backloading vs. frontloading, is superior to the other? The aim of the paper is to shed light on these questions using a multi-country reduced-form model. It considers explicitly that the Eurozone member states are facing a dual trade-off, first between labor market outcomes of consolidation and public debt dynamics and, second, between reducing public expenditures and increasing taxes. The main conclusion is that a tax-based backloaded consolidation is superior to all other strategies, be they spending-based or frontloaded, or both. Introducing risk premia endogenously does not alter the conclusion.

Keywords: fiscal consolidation; fiscal multiplier; composition effect; public debt; frontloading; backloading (search for similar items in EconPapers)
JEL-codes: E47 E61 E62 (search for similar items in EconPapers)
Date: 2015-03
New Economics Papers: this item is included in nep-eec and nep-mac
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Working Paper: Back to fiscal consolidation in Europe and its dual tradeoff: now of later, through spending cuts or tax hikes (2015) Downloads
Working Paper: Back to fiscal consolidation in Europe and its dual tradeoff: now or later, through spending cuts or tax hikes ? (2015) Downloads
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