CEPII, Recherche et Expertise sur l'economie mondiale
Fiscal Consolidations and Public Debt in Europe

Gianluca Cafiso
Roberto Cellini

 Highlights :
  • In recent times a wide debate has developed in Europe concerning the effect of fiscal consolidations on the evolution of the public-debt/GDP ratio.
  • In the context of the current crisis, fiscal consolidations were meant to reduce the debt/GDP ratio. However, the restrictive effect of a fiscal consolidation on the GDP might well offset the deficit reduction and cause an undesired debt/GDP increase.
  • Past events suggest a positive short-term effect, while the most-relevant medium-term effect seems to be negative. On the whole, savings-based fiscal consolidations are to be preferred in any case.

 Abstract :
The objective of this paper is to gain insights into the relationship between deficit-reducing policies and the evolution of the debt/GDP ratio. We consider past events of fiscal consolidation in a selected group of EU countries and check what is the associated change of the debt/GDP ratio both from a short and medium-term perspective. As for the medium-term perspective, we do also differentiate between tax-based and savings-based fiscal consolidations. Our results point towards a positive short-term effect, while the medium-term effect turns out to be negative. Savingsbased fiscal consolidations result to be less negative on the debt/GDP ratio’s evolution than tax-based ones.

 Keywords : Fiscal consolidations | debt/GDP ratio | Europe

 JEL : H63, E63
CEPII Working Paper
N°2013-35, November 2013

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 Fields of expertise

Economic Policy