THE MACROECONOMICS OF FISCAL CONSOLIDATIONS

Abstract

In the past decade, numerous governments had to adjust their fiscal balance, as a result of the Great Recession and most recently due to the fall in commodity prices. In Chapter 1, I construct a novel dataset to estimate the revenue-raising potential and expenditure-cutting space for 129 countries, and decompose their fiscal consolidation capacity into specific tax and spending categories. Then, I compare the estimated fiscal potential with the consolidation required to stabilize the debt ratio. Finally, I show that the estimated fiscal consolidation capacity in 2007 helps to predict (i) the size of fiscal stimulus in response to the crisis, and (ii) the GDP costs associated with the downturn.

In Chapter 2, I employ a quantitative general equilibrium model with heterogeneous agents, occupational choice, endogenous labor supply, and growth to study the implications for the US of the higher debt to GDP ratio that would result from delaying the adjustment of its medium term budgetary imbalance. I find that compared to a scenario where the debt ratio is stabilized in 2011, postponing the adjustment for twenty-five years would entail a permanent output loss of 22 percent and a fall in welfare of 13 percent in consumption equivalent terms. Moreover, when the transitional dynamics are considered, I find that once the debt ratio exceeds 100 percent of GDP, the welfare losses from further delays in the adjustment exceed the short run gains.