Effects of Austerity: Expenditure- and Tax-based Approaches

Alberto Alesina · Carlo A. Favero · Francesco Giavazzi

200 citations0/0 files storedThe Journal of Economic Perspectives

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Fiscal Policies and Political Economy Monetary Policy and Economic Impact Fiscal Policy and Economic Growth

Abstract

We review the debate surrounding the macroeconomic effects of deficit reduction policies (austerity). The discussion about "austerity" in general has distracted commentators and policymakers from a very important result, namely the enormous difference, on average, between expenditure- and tax-based austerity plans. Spending-based austerity plans are remarkably less costly than tax-based plans. The former have on average a close to zero effect on output and lead to a reduction of the debt/GDP ratio. Tax-based plans have the opposite effect and cause large and long-lasting recessions. These results also apply to the recent episodes of European austerity, which in this respect were not especially different from previous cases.

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References

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