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The Relationship Between Fiscal Consolidation and Sovereign Debt – Does Fiscal Correction Decrease or Increase Debt Rate?

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  • Marton, Ádám

Abstract

Today, the global economic environment can be described as “gracious”. The macro-economic framework created by in-terest rates close to zero and global excess liquidity enables the financing of high sovereign debt positions under market conditions. On the other hand, reducing sovereign debt as soon as possible is a necessary and indispensable economic policy measure. The study looks at the role of fiscal consolidation in debt reduction. Debt rate can be reduced in two main ways: by increasing the primary balance or through economic growth. Due to the Keynesian mechanisms of action, fiscal correction requires growth sacrifice, which may decrease or completely eliminate the positive effects of corrective measures. Corrective measures focusing on the revenue or the expenditure side may have different effects on output and debt reduction, depending on their degree, duration and nature. Based on the review of scientific literature and statistical analyses, it can be stated that the growth effect plays a key role in reducing the debt rate. In addition, the criteria for success include favourable economic environment, a low fiscal multiplier, and also identifiable steady expenditure-side measures.

Suggested Citation

  • Marton, Ádám, 2018. "The Relationship Between Fiscal Consolidation and Sovereign Debt – Does Fiscal Correction Decrease or Increase Debt Rate?," Public Finance Quarterly, Corvinus University of Budapest, vol. 63(1), pages 24-38.
    • Handle: RePEc:pfq:journl:v:63:y:2018:i:1:p:24-38
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    File URL: https://unipub.lib.uni-corvinus.hu/8747/
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    References listed on IDEAS

    as
    1. Mr. Luc Eyraud & Miss Anke Weber, 2013. "The Challenge of Debt Reduction during Fiscal Consolidation," IMF Working Papers 2013/067, International Monetary Fund.
    2. Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 75-122, National Bureau of Economic Research, Inc.
    3. Rother, Philipp & Cugnasca, Alessandro, 2015. "Fiscal multipliers during consolidation: evidence from the European Union," Working Paper Series 1863, European Central Bank.
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    More about this item

    Keywords

    fiscal correction; debt rate; economic growth; sovereign debt; growth effect;
    All these keywords.

    JEL classification:

    • A20 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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