The role of social expenditures in budget consolidations - an analysis of the fiscal and macroeconomic effects

by Norbert Gruber

Institution: Vienna University of Economics and Business
Year: 2013
Keywords: RVK QL 010
Record ID: 1031758
Full text PDF: http://epub.wu.ac.at/3772/1/Dissertation_Norbert_Gruber_%2D_Paper_gesamt.pdf


This paper reviews and summarizes the literature that has concentrated on budget consolidations and their fiscal and economic effects. The issue of fiscal adjustments has again gained importance due to the recent economic crisis and the resulting fiscal imbalances. The existing literature shows that there may be some factors that influence the fiscal and economic impact depending on the methods used and the underlying assumptions. Referring to the fiscal impact of consolidations, this paper concludes that the composition of the adjustment is the most influential factor in reducing public deficits and debt. This result is in line with other recent literature surveys. Other factors mentioned in the underlying studies include the specialization in certain expenditure areas like public administration and social security, the size of the adjustment, the initial state of public finances and the economy before consolidation, fiscal rules, political and monetary institutions. In contrast to the fiscal effects, the results of the studies concentrating on economic effects vary substantially. Since the early 90's there has been a lively debate about the possibility of non-Keynesian effects after consolidations. Despite the fact that there is no consensus about possible expansive effects of consolidations, this paper concludes that a substantial share of the previous work finds that large negative effects do not necessarily have to prevail. Whether these reversed effects are strong enough to turn restrictive effects into expansive ones depends on different factors, which are similar to those mentioned before in the fiscal effects context. (author's abstract)