The Effects of Fiscal Consolidation

This paper estimates the effects of fiscal consolidation on economic growth by using panel datasets from 18 OECD countries. As for the existence of expansionary fiscal consolidation, the estimates of dynamic panel data GMM analysis show that fiscal consolidation is not likely to be expansionary for GDP growth. Both Arellano-Bond difference GMM estimation and Blundell-Bond system GMM estimation suggest that fiscal consolidation has negative effects on economic growth. The results do not support the expansionary fiscal consolidation hypothesis. In particular, our analyses also find that fiscal consolidation in time of high debt-to-GDP ratios, the spending-base, or high sovereign risk has less negative effects on economic growth than those in time of low debt-to-GDP ratios, the tax-base, or low sovereign risk.