The effects of fiscal consolidations on the composition of government spending

Abstract : In response to increasing debt paths, governments often implement fiscal consolidation programs. This paper studies the impact of these programs on the composition of government spending. System-GMM estimations performed on a sample of 53 developed and emerging countries over 1980-2011 reveal that fiscal consolidations significantly reduce the government investment-to-consumption ratio, i.e. a composition effect. Robust to a wide set of tests, this significantly stronger contraction of government investment with respect to government consumption is at work particularly when debt is high, for spending-based fiscal consolidations, in the low phase of the economic cycle, and following debt and stock market crises. Therefore, in such contexts, fiscal consolidations aimed at short-run stabilization may hurt the economy in the long-run through their detrimental effect on public investment, calling for a reflection upon how they could be re-designed to allow avoiding such undesirable consequences.
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Submitted on : Thursday, February 21, 2019 - 11:35:42 AM
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Moulaye Bamba, Jean-Louis Combes, Alexandru Minea. The effects of fiscal consolidations on the composition of government spending. 2019. ⟨halshs-02043892⟩

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