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Fiscal consolidations and distributional effects: which form of fiscal austerity is least harmful?

journal contribution
posted on 16.09.2019 by Richard McManus, Gulcin Ozkan, Dawid Trzeciakiewicz
Distributional consequences of fiscal austerity, while being increasingly recognised in the policy debate, have received little attention in the existing formal work. This paper proposes a medium scale New-Keynesian DSGE model incorporating an appropriate dimension of household heterogeneity and a well-specified fiscal structure, allowing for a comprehensive analysis of losers and winners from austerity. We find that cutting transfers and public employment and raising labour income taxes are the most regressive forms of austerity, greatly raising income inequality. In contrast, raising capital income taxes is progressive - the only such policy in our analysis - with also the smallest output losses in the short-run. Second, the speed of austerity emerges as a potential tool in fiscal adjustment. Indeed, speedy austerity yields worst distributive and output effects irrespective of its composition. Finally, fiscal consolidation is particularly damaging in downturns where distributional effects are substantially more unfavourable than in normal times.
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  • Business and Economics

Department

  • Economics

Published in

Oxford Economic Papers

Publisher

Oxford University Press (OUP)

Version

AM (Accepted Manuscript)

Rights holder

© Oxford University Press

Publisher statement

This is a pre-copyedited, author-produced version of an article accepted for publication in Oxford Economic Papers following peer review. The version of record Richard McManus, F Gulcin Ozkan, Dawid Trzeciakiewicz, Fiscal consolidations and distributional effects: which form of fiscal austerity is least harmful?, Oxford Economic Papers, gpz065, https://doi.org/10.1093/oep/gpz065 is available online at: https://academic.oup.com/oep/advance-article/doi/10.1093/oep/gpz065/5612127?rss=1 and https://doi.org/10.1093/oep/gpz065.

Acceptance date

23/07/2019

Publication date

2019-11-04

Copyright date

2019

ISSN

0030-7653

eISSN

1464-3812

Language

en

Depositor

Dr Dawid Trzeciakiewicz

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