This paper investigates the relationship between fiscal contractions, permanent improvements in public finances and short-run economic performance. The empirical evidence gathered from the European experience over the last three decades shows clearly that the composition of fiscal adjustments and the length of the period over which they are implemented influence their likelihood of success. Adjustments that concentrate on the expenditure side and unfold over a relatively long time span (three or four years) are more likely to succeed in reducing the public debt/GDP ratio than tax-based or shorter adjustments. Furthermore, macroeconomic consequences are strictly related to the achievement of fiscal success. On average, successful contractions do not trigger economic slowdowns, but unsuccessful adjustments usually do. This evidence is interpreted via the theory known as the expectation view of fiscal policy.
Published in 2001 in: Applied Economics, v. 33, 5, pp. 613-624
