Fiscal Consolidation: Taking Stock of Success Factors, Impact, and Design

IMF Working Papers, March 17, 2023

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Canonical URL: Fiscal Consolidation: Taking Stock of Success Factors, Impact, and Design

Authors: Vybhavi Balasundharam, Olivier Basdevant, Dalmacio Benicio, Andrew Ceber, Yujin Kim, Luca Mazzone, Hoda Selim, Yongzheng Yang
Published: March 17, 2023
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798400235221.001

Surges in public debt in many countries since the COVID-19 pandemic have rekindled interest in fiscal consolidations, which often entail difficult policy choices in the face of economic and political constraints.
The paper presents findings from a survey of the literature on fiscal consolidations, focusing on:
- pre-existing conditions of consolidation episodes,
- impact and design aspects of past consolidation episodes.
The survey provides insight into factors that influence:
- the chance of successful consolidations,
- their growth and distributional impact,
- the pace, phasing, duration and policy mix of reforms to mitigate the impact,
- the role of fiscal institutions and capacity development in successful consolidations.

Factors influencing the chance of successful consolidations include pre-existing conditions and institutional capacity.
Consolidation episodes have measurable growth and distributional impacts that depend on policy design and implementation.
The pace, phasing, duration, and policy mix of reforms matter for mitigating adverse effects on growth and distribution.
Fiscal institutions and capacity development play a role in enabling successful consolidations.

Trade-offs between growth and fiscal adjustment outcomes depend on the composition and sequencing of measures (spending cuts versus revenue measures).
Designing consolidations to limit adverse distributional effects requires attention to policy mix and phasing.
Strengthening fiscal institutions and tax administration capacity supports more effective and sustainable consolidation outcomes.