The Composition of Fiscal Consolidation Matters : Policy Simulations for Hungary

Author/Editor: Alejandro D. Guerson
Publication Date: October 04, 2013
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: This paper evaluates policy alternatives to achieve permanent fiscal consolidation in Hungary, based on a general equilibrium calibration. The main finding is that the composition of the consolidation, as determined by the mix of revenue and expenditure measures, has important implications for growth, employment, investment, and other key macroeconomic variables. A reduction in current expenditures yields the smallest GDP contraction in the short term and can increase output in the long term by stimulating labor participation and private investment. On the other end of the spectrum, a consolidation of government investment and corporate taxes are the most costly, as disincentives for private investment result in protracted declines in GDP that compound over time to GDP losses that are multiple times the initial size of the consolidation.
Series: Working Paper No. 13/207
Subject(s): Fiscal consolidation | Hungary | Fiscal policy | Economic models

Publication Date: October 04, 2013
ISBN/ISSN: 9781484305225/1018-5941 Format: Paper
Stock No: WPIEA2013207 Pages: 29
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