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Fiscal Consolidation: How much, how fast and by what means?

An Economic Outlook Report, OECD Economics Policy Paper No. 1, 12 April 2012
http://www.oecd.org/dataoecd/5/9/50106656.pdf

[full-text, 31 pages]

Key policy messages

• Many countries face enormous fiscal consolidation challenges. Even if debt-to-GDP ratios stabilise over the medium term, they would remain at dangerous levels.
• Countries should reduce debt levels to around 50% of GDP or lower to provide a safety margin against future adverse shocks.
• Some countries – including Greece, Iceland, Ireland, Portugal and Spain – have started fiscal consolidations of between 5% and 12% of GDP, which are very large by historical comparison.
• Other countries, notably, Japan, the United Kingdom and the United States require a fiscal tightening that would exceed 5% of GDP in order to bring their debt back to 50% of GDP by around mid-century.
• Spending pressures, principally from health and long-term care will continue to mount, and could require an additional permanent fiscal tightening of several percentage points of GDP to help keep debt down in the future.
• Due to the scale of consolidation needs, most countries will need a sustained period of fiscal tightening, acting on both the revenue and spending side.
• The extent to which revenue or spending bears the brunt of consolidation will depend on whether spending is already high.
• Given the current state of the economy and the already exhausted monetary stimulus, implementing a large degree of fiscal tightening could be particularly costly.
• Using instruments with low multipliers initially may help minimise the trade-off with growth in the short run, but could involve other trade-offs, such as with credibility of the effort.
• Given the scale of ageing and other spending pressures, reforms to entitlement programmes need to be an important part of any longer-term sustainability strategy.
• Potential budgetary savings have been identified, which are either growth-friendly or have little adverse effect on economic activity. For most countries they amount to between 4% and 10% of GDP. More specifically:
  • Efficiency gains in public spending on health and education could yield savings of 0.5% to 4.5% of GDP in the longer term.
  • There is scope to broaden tax bases by eliminating tax expenditures (such as tax credits or deductions). These can be costly, with individual large items accounting for 1% of GDP or even more in many countries.
  • Environmental taxes, user fees for government services, taxes on immovable property and well designed financial sector levies could support fiscal consolidation while minimising welfare costs.
• Fiscal institutions and fiscal rules may be helpful in buttressing credibility. In the longer run, better institutional frameworks can help ensure that fiscal policy stays on track.

Related material:

Fiscal consolidation: How much is needed to reduce debt to a prudent level?

http://www.oecd.org/dataoecd/25/63/50100974.pdf

OECD Economics Department Policy Note No. 11

What are the best policy instruments for fiscal consolidation?

http://www.oecd.org/dataoecd/26/4/50100775.pdf
OECD Economics Department Policy Note No. 12

Economics Department Working Papers on fiscal consolidation

       How much is needed and how to reduce debt to a prudent level?

       http://www.oecd-ilibrary.org/economics/fiscal-consolidation-part-1-how-much-is-needed-and-how-to-reduce-debt-to-a-prudent-level_5k9h28rhqnxt-en

       or
http://www.oecd-ilibrary.org/fiscal-consolidation-part-1-how-much-is-needed-and-how-to-reduce-debt-to-a-prudent-level_5k9h28rhqnxt.pdf;jsessionid=3ammo94e9smj5.epsilon?contentType=/ns/WorkingPaper&itemId=/content/workingpaper/5k9h28rhqnxt-en&containerItemId=/content/workingpaperseries/18151973&accessItemIds=&mimeType=application/pdf

       [full-text, 76 pages]

       Fiscal multipliers and fiscal consolidation

       http://www.oecd-ilibrary.org/economics/fiscal-consolidation-part-2-fiscal-multipliers-and-fiscal-consolidations_5k9fdf6bs78r-en

       Or
http://www.oecd-ilibrary.org/fiscal-consolidation-part-2-fiscal-multipliers-and-fiscal-consolidations_5k9fdf6bs78r.pdf?contentType=/ns/WorkingPaper&itemId=/content/workingpaper/5k9fdf6bs78r-en&containerItemId=/content/workingpaperseries/18151973&accessItemIds=&mimeType=application/pdf

       [full-text, 43 pages]

       Long-run projections and fiscal gap calculations

       http://www.oecd-ilibrary.org/economics/fiscal-consolidation-part-3-long-run-projections-and-fiscal-gap-calculations_5k9h28p42pf1-en

       or

       http://www.oecd-ilibrary.org/fiscal-consolidation-part-3-long-run-projections-and-fiscal-gap-calculations_5k9h28p42pf1.pdf?contentType=/ns/WorkingPaper&itemId=/content/workingpaper/5k9h28p42pf1-en&containerItemId=/content/workingpaperseries/18151973&accessItemIds=&mimeType=application/pdf

       [full-text, 42 pages]

       Case studies of large fiscal consolidation episodes

       http://www.oecd-ilibrary.org/economics/fiscal-consolidation-part-4-case-studies-of-large-fiscal-consolidation-episodes_5k9fdf5xptlq-en

       or

       http://www.oecd-ilibrary.org/fiscal-consolidation-part-4-case-studies-of-large-fiscal-consolidation-episodes_5k9fdf5xptlq.pdf?contentType=/ns/WorkingPaper&itemId=/content/workingpaper/5k9fdf5xptlq-en&containerItemId=/content/workingpaperseries/18151973&accessItemIds=&mimeType=application/pdf

       [full-text, 40 pages]

       What factors determine the success of consolidation efforts?

       http://www.oecd-ilibrary.org/economics/fiscal-consolidation-part-5-what-factors-determine-the-success-of-consolidation-efforts_5k9h28mzp57h-en

       or

       http://www.oecd-ilibrary.org/fiscal-consolidation-part-5-what-factors-determine-the-success-of-consolidation-efforts_5k9h28mzp57h.pdf?contentType=/ns/WorkingPaper&itemId=/content/workingpaper/5k9h28mzp57h-en&containerItemId=/content/workingpaperseries/18151973&accessItemIds=&mimeType=application/pdf

       [full-text, 29 pages]

       What are the best policy instruments for fiscal consolidation?

       http://www.oecd-ilibrary.org/economics/fiscal-consolidation-part-6-what-are-the-best-policy-instruments-for-fiscal-consolidation_5k9h28kd17xn-en

       or

       http://www.oecd-ilibrary.org/fiscal-consolidation-part-6-what-are-the-best-policy-instruments-for-fiscal-consolidation_5k9h28kd17xn.pdf?contentType=/ns/WorkingPaper&itemId=/content/workingpaper/5k9h28kd17xn-en&containerItemId=/content/workingpaperseries/18151973&accessItemIds=&mimeType=application/pdf

       [full-text, 62 pages]