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

Author

Listed:
  • Christophe Blot

    (OFCE - Sciencespo Auhor-Email :christophe.blot@sciencespo.fr)

  • Jerôme Creel

    (OFCE-Sciencespo & ESCP)

  • Bruno Ducoudré

    (OFCE-Sciencespo)

  • Xavier Timeau

    (OFCE-Sciencespo)

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 toshed light on these questions using a multi-country reduced-form model. It considers explicitly that the Eurozone member states arefacing 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 backloadedconsolidation is superior to all other strategies, be they spending-based or frontloaded, or both. Introducing risk premia endogenously does not alter the conclus.

Suggested Citation

  • Christophe Blot & Jerôme Creel & Bruno Ducoudré & Xavier Timeau, 2015. "Back to fiscal consolidation in Europe and its dual tradeoff : now of later, through spending cuts or tax hikes," Documents de Travail de l'OFCE 2015-11, Observatoire Francais des Conjonctures Economiques (OFCE).
    • Handle: RePEc:fce:doctra:1511
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    More about this item

    Keywords

    fiscal consolidation; fiscal multiplier; composition effect; public debt; frontloading; backloading;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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