1887

OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

English, French

How to Achieve Growth- and Equity-friendly Fiscal Consolidation?

A Proposed Methodology for Instrument Choice with an Illustrative Application to OECD Countries

Despite sustained efforts made in recent years to rein in budget deficits, a majority of OECD countries still face substantial fiscal consolidation needs. The choices made about which spending areas to curtail and which taxes to hike will have implications for near-term activity and long-term growth as well as for equity and the current account. This paper proposes a method for choosing the instruments of consolidation so that they contribute to -- or minimise trade-offs with -- the goals of promoting near-term activity, longterm growth, equity, and global rebalancing. The proposed method is illustrated with detailed simulations for 31 OECD countries which are accompanied by an extensive range of alternative scenarios to confirm the robustness of the findings. The simulations highlight that half of OECD countries can reduce excess debt mainly through moderate adjustments to instruments (such as subsidies, pensions or property taxes) that have at most limited side-effects on other policy objectives. They also show that a smaller number of countries face more difficult choices, having to either make bigger adjustments in areas where spending cuts or tax hikes are least harmful or to rely significantly on consolidation instruments with substantial adverse side-effects. These trade-offs can to a large extent be alleviated through structural reforms in the delivery of public services and in taxation.

English

Keywords: growth, equity, global imbalances, fiscal consolidation, income distribution, structural reforms
JEL: H68: Public Economics / National Budget, Deficit, and Debt / Forecasts of Budgets, Deficits, and Debt; H63: Public Economics / National Budget, Deficit, and Debt / National Debt; Debt Management; Sovereign Debt; H62: Public Economics / National Budget, Deficit, and Debt / National Deficit; Surplus
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