Fiscal adjustments and economic performing: a comparative study

The empirical relationship among fiscal contractions, permanent improvement in public finances and short-run economic performance is examined using a sample of 14 European countries over the last three decades. The actual exp erience of policy-making has taught that only the adjustments that relied h eavily on primary expenditure cuts and were implemented over a relatively l ong time span were able to achieve a long lasting reduction of public liabi lities. Indeed, during these consolidations, tax increase amounted to a sma ll fraction of the total adjustment. Furthermore, though they unfolded over a longer period with respect to the unsuccessful ones, the overall budget cut was not larger. As regards the macroeconomic impact, successful episode s tended to be associated with improved economic performance. During the ad justment period and in the following two years, the economies experienced s trong consumption and investment growth, reduced unemployment, better inter national competitiveness and falling interest rates. This empirical evidenc e is here interpreted via the theory known as expectation view of fiscal po licy.