{
  "title": "Improving Economic Growth: Cut Spending or Raise Taxes?",
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  "summary": "A new study offers more evidence that cutting spending is less harmful to economic growth than raising taxes.",
  "sections": [
    {
      "heading": "Summary and context",
      "content": "- Study based on forthcoming book Austerity: When It Works and When It Does Not by Alberto Alesina, Carlo A. Favero, Francesco Giavazzi; published in F&D Magazine, March 2018.\n- Focus: short-term macroeconomic effects of deficit-reduction plans in a sample of developed economies.\n- Sample and scope:\n  - 16 of the 35 countries belonging to the Organisation for Economic Co-operation and Development between 1981 and 2014.\n  - Analysis of some 3,500 policy changes geared toward reducing deficits either by raising taxes or by cutting spending.\n  - Excludes fiscal measures aimed at stabilizing output and excludes postcommunist nations.\n  - Focuses on developed economies; does not analyze developing economies or long-term issues such as the impact of aging populations on pensions."
    },
    {
      "heading": "Data, methodology, and classification",
      "content": "- Fiscal plans reconstructed as multiyear plans typically spanning three to four years.\n- Plans divided into:\n  - Expenditure-based plans: consisting mostly of spending cuts.\n  - Tax-based plans: consisting mostly of tax hikes.\n- Excludes fiscal measures that are endogenous to the state of the economy (e.g., cyclical stabilization)."
    },
    {
      "heading": "Key empirical findings",
      "content": "- Public debt context (as stated in the source):\n  - Advanced-economy national debt averaging 104 percent of GDP.\n  - Japan: 240 percent of GDP.\n  - Greece: almost 185 percent of GDP.\n  - Italy and Portugal: debt exceeds 120 percent of GDP.\n- Macroeconomic effects of fiscal corrections:\n  - Expenditure-based plans:\n    - A plan worth 1 percent of GDP implied a loss of about half a percentage point relative to the average GDP growth of the country.\n    - The loss in output typically lasted less than two years.\n    - If launched during a period of economic growth, the output costs were zero, on average.\n    - Some spending-based plans were associated with almost immediate surges in growth (phenomenon termed “expansionary austerity”).\n  - Tax-based plans:\n    - A tax-based plan amounting to 1 percent of GDP was followed, on average, by a 2 percent decline in GDP relative to its pre-austerity path.\n    - This large recessionary effect tends to last several years.\n- Social-security and entitlement reforms:\n  - Reductions in entitlement programs and other government transfers were less harmful to growth than tax increases.\n  - Such cuts were accompanied by mild and short-lived economic downturns.\n- Private-sector responses:\n  - Private investment responded positively to spending-based plans and negatively to tax-based plans.\n  - Business confidence increased immediately at the start of a spending-based austerity plan and did not for tax-based plans.\n  - Household consumption and net exports did not appear to differ on average between the two types of adjustments.\n- Post-2008 crisis episodes:\n  - Outcomes of large postcrisis austerity episodes did not differ significantly from previous episodes.\n  - Countries that chose tax-based austerity suffered deeper recessions than those that chose to cut spending.\n  - Examples: Ireland and the United Kingdom adopted spending-based austerity and performed relatively well given circumstances.\n- United Kingdom fiscal specifics (2010–2014):\n  - Spending cuts (planned or immediately implemented) between 2010 and 2014 amounted to 2.9 percent of GDP—about 0.6 percent a year on average.\n  - Of these measures, 87 percent were implemented within this five-year interval, with the rest deferred.\n  - Investment growth recovered from the 21 percent drop of 2009 and increased almost 6 percent in 2010."
    },
    {
      "heading": "Possible explanations evaluated",
      "content": "- Monetary policy:\n  - Prior literature (Guajardo, Leigh, and Pescatori 2014) attributes differences largely to monetary policy responses.\n  - This study finds only a small fraction of the difference attributable to monetary policy.\n- Exchange-rate effects:\n  - No systematic difference found in exchange-rate behavior before tax- versus spending-based adjustments.\n  - Net exports did not drive the differential outcomes; domestic private investment was the driving force.\n- Structural reforms:\n  - Large fiscal adjustments often coincide with structural reforms, but such reforms did not systematically occur during periods of spending cuts in the sample.\n- Confidence and expectations:\n  - Removing uncertainty about fiscal stabilization can stimulate demand, particularly investment.\n  - Spending-based plans are more likely to be perceived as permanently addressing the budget problem (including automatic growth of entitlements), increasing business confidence.\n  - Tax-based plans that do not address automatic spending growth generate expectations of future tax increases, dampening confidence and investment.\n- Supply-side and persistence effects:\n  - A longer-lasting tax-based plan produces a deeper recession, likely due to persistent distortionary effects on labor supply and investment.\n  - A longer-lasting spending cut may signal future potential tax reductions and thus produce milder recessionary effects."
    },
    {
      "heading": "Policy implications and bottom line",
      "content": "- The way the budget deficit is corrected matters for the debt-to-GDP ratio outcome:\n  - If a surplus is increased by raising taxes, the downturn in growth may be so large that it raises rather than reduces the debt-to-GDP ratio.\n  - Deficit reduction policies based on spending cuts typically have almost no effect on output, making them more reliable for reducing debt-to-GDP.\n- Reforms of social security rules and entitlement reductions are comparatively less costly in terms of lost output and can be more effective in restoring fiscal sustainability with smaller short-term growth costs.\n- Restoring fiscal health should consider the persistence and credibility of measures to influence expectations, business confidence, and private investment."
    },
    {
      "heading": "Authors",
      "content": "- ALBERTO ALESINA, Nathaniel Ropes Professor of Political Economy, Harvard University.\n- CARLO A. FAVERO, Deutsche Bank chair in quantitative finance and asset pricing, Bocconi University.\n- FRANCESCO GIAVAZZI, Professor of Economics, Bocconi University.\n\nSource: F&D Magazine, March 2018 — Alberto Alesina, Carlo A. Favero, Francesco Giavazzi.\n\n---\n\n Content in this bundle\n\n- Improving Economic Growth: Cut Spending or Raise Taxes? - IMF F&D Magazine\n  - Improving Economic Growth: Cut Spending or Raise Taxes? - IMF F&D Magazine (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Improving Economic Growth: Cut Spending or Raise Taxes? - IMF F&D Magazine (PDF){rel=\"external\" type=\"application/pdf\"}\n- تسلق جبال الديون\n  - تسلق جبال الديون (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - تسلق جبال الديون (PDF){rel=\"external\" type=\"application/pdf\"}\n- Saliendo del abismo de la deuda ● Ejercicio de equilibrio ● Finanzas y Desarrollo ● Marzo de 2018\n  - Saliendo del abismo de la deuda ● Ejercicio de equilibrio ● Finanzas y Desarrollo ● Marzo de 2018 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Saliendo del abismo de la deuda ● Ejercicio de equilibrio ● Finanzas y Desarrollo ● Marzo de 2018 (PDF){rel=\"external\" type=\"application/pdf\"}\n- Sortir du gouffre de la dette\n  - Sortir du gouffre de la dette (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Sortir du gouffre de la dette (PDF){rel=\"external\" type=\"application/pdf\"}\n- 財政再建の分かれ道\n  - 財政再建の分かれ道 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - 財政再建の分かれ道 (PDF){rel=\"external\" type=\"application/pdf\"}\n- Выбираясь из долгов – Финансы и развитие – март 2018 года\n  - Выбираясь из долгов – Финансы и развитие – март 2018 года (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Выбираясь из долгов – Финансы и развитие – март 2018 года (PDF){rel=\"external\" type=\"application/pdf\"}\n- 摆脱债务 - <金融与发展, 2018年3月号·第55卷·第1期, 国际货币基金组织季刊\n  - 摆脱债务 - <金融与发展, 2018年3月号·第55卷·第1期, 国际货币基金组织季刊 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - 摆脱债务 - <金融与发展, 2018年3月号·第55卷·第1期, 国际货币基金组织季刊 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/fandd/issues/2018/03/alesina"
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    "Authors: ALBERTO ALESINA, CARLO A FAVERO, FRANCESCO GIAVAZZI",
    "Published: March 1, 2018",
    "Study based on forthcoming book Austerity: When It Works and When It Does Not by Alberto Alesina, Carlo A. Favero, Francesco Giavazzi; published in F&D Magazine, March 2018.",
    "Focus: short-term macroeconomic effects of deficit-reduction plans in a sample of developed economies.",
    "Sample and scope:",
    "Fiscal plans reconstructed as multiyear plans typically spanning three to four years.",
    "Plans divided into:",
    "Excludes fiscal measures that are endogenous to the state of the economy (e.g., cyclical stabilization).",
    "Public debt context (as stated in the source):",
    "Macroeconomic effects of fiscal corrections:",
    "Social-security and entitlement reforms:",
    "Private-sector responses:",
    "Post-2008 crisis episodes:",
    "United Kingdom fiscal specifics (2010–2014):",
    "Monetary policy:",
    "Exchange-rate effects:",
    "Structural reforms:",
    "Confidence and expectations:",
    "Supply-side and persistence effects:",
    "The way the budget deficit is corrected matters for the debt-to-GDP ratio outcome:",
    "Reforms of social security rules and entitlement reductions are comparatively less costly in terms of lost output and can be more effective in restoring fiscal sustainability with smaller short-term growth costs.",
    "Restoring fiscal health should consider the persistence and credibility of measures to influence expectations, business confidence, and private investment.",
    "ALBERTO ALESINA, Nathaniel Ropes Professor of Political Economy, Harvard University.",
    "CARLO A. FAVERO, Deutsche Bank chair in quantitative finance and asset pricing, Bocconi University.",
    "FRANCESCO GIAVAZZI, Professor of Economics, Bocconi University.",
    "**Improving Economic Growth: Cut Spending or Raise Taxes? - IMF F&D Magazine**",
    "**تسلق جبال الديون**",
    "**Saliendo del abismo de la deuda ● Ejercicio de equilibrio ● Finanzas y Desarrollo ● Marzo de 2018**",
    "**Sortir du gouffre de la dette**",
    "**財政再建の分かれ道**",
    "**Выбираясь из долгов – Финансы и развитие – март 2018 года**",
    "**摆脱债务 - <金融与发展>, 2018年3月号·第55卷·第1期, 国际货币基金组织季刊**"
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