Mar 15 2011 -
Fiscal consolidations are programs to reduce government budget deficits and stabilize debt as a percentage of GDP.
Fiscal consolidation programs that rely predominately or entirely on spending reductions are more likely to achieve their goals of government budget deficit reduction and debt stabilization as a percentage of GDP than programs that rely primarily on tax increases.
In the long term, fiscal consolidation programs that reduce government spending as a percentage of GDP accelerate economic growth.
In the short term, fiscal consolidation programs that rely predominately or entirely on spending reductions have expansionary “non-Keynesian” effects that may offset the contractionary Keynesian reduction in aggregate demand.
In some cases, “non-Keynesian” effects may be strong enough to make fiscal consolidation programs expansionary in the short term.
Eliminating agencies and programs; cutting the number and compensation of government workers; and reducing transfer payments to households and firms have strong “non-Keynesian” effects.
Reforming government pension and health insurance programs for the elderly to make them sustainably solvent may also have strong “non-Keynesian” effects even if reforms are phased in slowly, do not affect current beneficiaries, and do not significantly reduce government outlays in the short term.
- Commentary - Spend Less Owe Less Grow the Economy - (1.2 MBs)