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Discussion Papers

The Evaluation of Fiscal Consolidation Strategies

No.51

The Evaluation of Fiscal Consolidation Strategies

Authors: Švarda, N. , Valachyová, J. , Senaj, M. and Siebertová, Z.
Published: October 2018
Keywords: MICROSIMULATION, GENERAL EQUILIBRIUM, TAX AND TRANSFER SYSTEM, GOVERNMENT POLICY
JEL classification: C63, H22, I38

Abstract:

In this paper, we present a framework and perform an assessment of different fiscal consolidation strategies both on the revenue as well as on the expenditure sides of the budget in the context of Slovakia. The model we use for simulations is a behavioural general-equilibrium what_if model. We analyse the simulated impacts of consolidation strategies on growth and on fiscal balance (both in short- and long- term). The microsimulation approach allows us also to evaluate the distributional impacts. In addition, the approach permits to compare the statutory with the resulting tax incidence in the long-run. We simulate strategies based on taxing labour income, taxing consumption as well as cutting expenditures on social transfers. We document that corporate and labour taxes are more unfavourable to output growth, while consumption taxes belong to less damaging instruments for consolidation. We show that spending cuts may promote employment and are not detrimental to output growth.

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