Austerity in 2009-2013

In their article, the authors aim at providing an effective empirical measure of the effects of these deficit reduction policies on output growth. To reach such key goal, the authors construct a new detailed "narrative" data set which documents the actual size and composition of the fiscal plans implemented by several countries in the period 2009-2013. More prominently, the authors investigate the relationship austerity-recessions by conditioning on the different types of fiscal austerity policies, and also examine whether the recent round of fiscal consolidation policies have been peculiar effects compared to those implemented in “normal” times. Interestingly, the empirical evidence provided by the authors indicates that the difference between the spending cuts and tax increases policies is very large and significant. Over an estimation period (1978-2007) the average tax-based adjustment plan with an initial size of one per cent of GDP results in a cumulative contraction in GDP of two per cent in the following three years. On the other hand, spending-based deficit reduction generates mild recessions with an effect on the aggregate economic growth not significantly different from zero. In this respect the recent episodes of austerity do not look different from previous ones. The authors’ results point decisively to the role of government spending cuts as a more effective way to reduce deficits, at least in several European countries. Such results, however, are mute on the question whether the countries have been studied did the right thing implementing fiscal austerity at the time they did, that is 2009-13.