Budget Consolidation: Short-Term Pain and Long-Term Gain
IMF Working Papers, July 1, 2010
Source details
- Canonical URL
- Budget Consolidation: Short-Term Pain and Long-Term Gain
Other formats
Bibliographic details
- Authors: Douglas Laxton, Susanna Mursula, Kevin Clinton, Michael Kumhof
- Published: July 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455201464.001
Overview and central findings
- The paper evaluates the costs and benefits of fiscal consolidation using simulations based on the IMF’s global DSGE model GIMF.
- Over the longer run, well-targeted permanent reductions in budget deficits lead to a considerable increase in both the growth rate and the level of output.
- The gains may be enhanced by shifting some of the tax burden from incomes to consumption.
- In the short run, credibility plays a crucial role in determining the size of initial output losses.
- Global current account imbalances would be significantly reduced if budget consolidation was larger in countries with current account deficits.
Policy-relevant implications and recommendations
- Implement well-targeted permanent deficit reductions to raise both the growth rate and the level of output in the longer run.
- Consider shifting part of the tax burden from incomes to consumption to enhance long-run gains from consolidation.
- Prioritize credibility of fiscal consolidation plans to minimize short-run output losses.
- Encourage larger consolidation efforts in countries with current account deficits to materially reduce global current account imbalances.
Thematic tags and keywords
- Subject: Consumption, Consumption taxes, Fiscal consolidation, Public debt, Real interest rates
- Keywords: current account, fiscal policy, present discounted value, real interest rate, WP
IMF Working Paper: "Budget Consolidation: Short-Term Pain and Long-Term Gain", Douglas Laxton, Susanna Mursula, Kevin Clinton, and Michael Kumhof; Working Paper No. 2010/163; DOI: https://doi.org/10.5089/9781455201464.001.