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  5. Effects of Austerity: Expenditure- and Tax-Based Approaches

Effects of Austerity: Expenditure- and Tax-Based Approaches

  • Alberto Alesina
  • Carlo Favero
  • Francesco Giavazzi
Journal of Economic Perspectives
vol. 33, no. 2, Spring 2019
(pp. 141-62)
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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/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.

Citation

Alesina, Alberto, Carlo Favero, and Francesco Giavazzi. 2019. "Effects of Austerity: Expenditure- and Tax-Based Approaches." Journal of Economic Perspectives, 33 (2): 141-62. DOI: 10.1257/jep.33.2.141

Additional Materials

JEL Classification

  • E23 Macroeconomics: Production
  • E32 Business Fluctuations; Cycles
  • E62 Fiscal Policy
  • H20 Taxation, Subsidies, and Revenue: General
  • H50 National Government Expenditures and Related Policies: General
  • H62 National Deficit; Surplus
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