Reducing Budget Deficits

Abstract

This paper compares the evidence concerning successful versus unsuccessful fiscal adjustments, where success is defined in terms of achieving a lasting debt reduction. The goal is to understand from successful adjustments, what policies can help the governments of countries which will soon have to implement vigorous fiscal retrenchments. We focus, in particular, on two questions: (1) is the composition of fiscal adjustments different in successful versus unsuccessful cases? That is, are successful fiscal adjustments typically achieved by means of expenditure cuts or tax increases? Which components in the expenditure and revenue sides should be adjusted? (2) What are the macroeconomic consequences of fiscal adjustments, and, are they different in successful versus unsuccessful cases?

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