Effects of Austerity: Expenditure- and Tax-based Approaches

Carlo Favero (), Francesco Giavazzi and Alberto Alesina

No 13565, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 over 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.

Keywords: Austerity; Fiscal adjustment plans; Output growth (search for similar items in EconPapers)
JEL-codes: E60 E62 (search for similar items in EconPapers)
Date: 2019-03
New Economics Papers: this item is included in nep-eec, nep-mac and nep-pub
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Citations: View citations in EconPapers (88)

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Journal Article: Effects of Austerity: Expenditure- and Tax-Based Approaches (2019)
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