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To consolidate or not to consolidate? A multi-step analysis to assess needed fiscal sustainability

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  • Afonso, António
  • Alves, José
  • Jalles, João Tovar

Abstract

We assess a country's specific need (or its absence) to implement a fiscal consolidation programme by focusing specifically on its degree of success, notably in terms of fiscal sustainability. The “need” to consolidate is based on having a primary balance above or below the debt-stabilizing primary balance (provided by the IMF's Debt Sustainability Analysis) for each country. We then link the need for and the actual (historical) existence of fiscal adjustments to their sustainability impact. Looking at a large sample of developed and developing economies over the period 1980–2018, we find that, on average, there is a higher need for consolidations in advanced economies than in developing economies. In addition, implementating a fiscal consolidation program implies an improvement in the degree of public finances' sustainability for advanced and developing economies. Finally, fiscal sustainability deteriorates when the need to implement a fiscal retrenchment arises.

Suggested Citation

  • Afonso, António & Alves, José & Jalles, João Tovar, 2022. "To consolidate or not to consolidate? A multi-step analysis to assess needed fiscal sustainability," International Economics, Elsevier, vol. 172(C), pages 106-123.
    • Handle: RePEc:eee:inteco:v:172:y:2022:i:c:p:106-123
    DOI: 10.1016/j.inteco.2022.09.005
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    2. Eugene Msizi Buthelezi & Phocenah Nyatanga, 2023. "Time-Varying Elasticity of Cyclically Adjusted Primary Balance and Effect of Fiscal Consolidation on Domestic Government Debt in South Africa," Economies, MDPI, vol. 11(5), pages 1-27, May.
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    More about this item

    Keywords

    Fiscal consolidations; Cyclically-adjusted primary balance; Sustainability; Panel data; Time-varying;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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