The Unassuming Economist

From a paper by Paolo Di Lorenzo and Eric Anthony Lacey“

“This paper provides an overview of issues related to fiscal consolidation drawing on the
literature; it distills some lessons from fiscal consolidation episodes using a new database covering
196 countries from 2000 to 2023. The paper discusses the motives, timing, design, and political
economy of fiscal consolidation, as well as its macroeconomic and social impacts. We find that
fiscal consolidation is often necessary and successful in restoring fiscal sustainability by stopping
debt accumulation, but less successful in lowering debt levels; moreover, it can also entail
significant costs and trade-offs in terms of growth, poverty, and inequality. Composition also
matters, as expenditure-based consolidations tend to be more successful than revenue-based
consolidations and less likely to cause a deterioration in poverty rates or inequality. However,
revenue gains usually play an important role starting in the second year of consolidation. Overall,
the paper suggests that successful fiscal consolidation requires careful consideration of the
economic context, the composition of adjustment, complementary economic policies, and
communication and credibility of the strategy. The best way to implement fiscal adjustment is to
establish a consolidation strategy in normal/non-crisis times} to ensure that governments do not
have to rely on abrupt, pro-cyclical adjustments that may exhaust all buffers in the aftermath of a
shock.

“