Smart Fiscal Consolidation: A Strategy for Achieving Sustainable Public Finances and Growth

Abstract

Due to high government debt levels and the dangers of self-defeating austerity, smart fiscal consolidation measures are needed that foster economic growth. A thorough review of the relevant literature provides many useful insights. To regain credibility, a clearly communicated broad reform program (including structural reforms) is required. Targeting mainly public expenditures, rather than revenues, raises the chances of expansionary effects. The timing of consolidation should focus on adjustment in structural terms to leave room for automatic stabilisers. The main part of the study evaluates the impact of individual consolidation and fiscal reform measures on consolidation success, on economic growth (in the long and short term), and on social fairness.

Footnotes

Jürgen Matthes is a Senior Economist at the Cologne Institute for Economic Research (Institut der deutschen Wirtschaft Köln–-IW Köln). Since 2012, he has been Head of the International Economic Order department in the institute. Before, he held several positions in the IW Köln since 1995. His main thematic focus currently lies on the Euro debt crisis. Moreover, he has published on a wide range of issues in the international economic policy field.

Galina Kolev is an economist at the Cologne Institute for Economic Research (Institut der deutschen Wirtschaft Köln–-IW Köln) and a Lecturer at the Baden-Wuerttemberg Cooperative State University. She has been a Research Assistant at the Chair of Economics/Political Economy, under Prof. Dr Roland Vaubel, at the University of Mannheim. Her research experience includes topics from the field of international economic policy, especially international macroeconomics.