Small Fiscal Multipliers Do Not Justify Austerity: A Macroeconomic Accounting Analysis of Public Debt-to-GDP Dynamics

Abstract:

In the aftermath of the Great Recession, a debate about the size of fiscal multipliers emerged. Whatever the estimation approach, fiscal multipliers assumed for projections are the result of extrapolations from time-series data. In this article, I take a different perspective by answering the following question: Is it really necessary to know the value of fiscal multipliers to make sensible policy decisions?

Keywords::

• consolidation programs
• debt-to-GDP ratio
• Eurozone crisis
• fiscal multipliers

JEL Classification Codes::

• E62
• H62
• O43

Notes

¹ My empirical exercise here focuses on Eurozone countries, which are in the peculiar situation of not having monetary sovereignty. Even though I do not discuss the issue, it is worth pointing out that a relevant strand of literature has addressed the interrelations between the Treasury, the Central Bank, and fiscal policies. Suffice here to recall Marc Lavoie (2013) and Eric Tymoigne (2014).

² See, for example, Luigi Pasinetti (1998).

³ Actually, they assume that it is null.

⁴ By definition, the primary balance pbal is given by the sum of a structural, or cyclically adjusted component (caph and by a cyclical component (cb):pbal_t=capb_t+cb_t.

⁵ According to OECD, budget balance semi-elasticity “is defined as the difference between the cyclical sensitivity of the four categories of taxes and the one expenditure item, weighted by their respective shares in GDP” (Girouard and André 2005, 49, ft.28; for details, also see Mourre et al. 2013, 12).

⁶ For details about estimation techniques, see Gilles Mourre et al. (2013), as well as Nathalie Girouard and Christophe André (2005).

⁷ Incidentally, this result implies that the “complex and time-consuming simulations using detailed information of the change in the tax codes and micro-data on household income” – “since it means computing both the elasticity of individual tax revenues/expenditures with respect to their base and the reaction of the different tax/expenditure bases to the output gap” (Mourre et al. 2013, 6), which are necessary to estimate ɛ— lead to a result that is almost the same as the tax rate t that I estimate here.

⁸ The three scenarios correspond to the low-, average-, and high-multiplier scenarios considered by Boussard, de Castro, and Salto (2012), as well as by Katia Berti, Francisco de Castro, and Matteo Salto (2013).

⁹ Such objectives were set by the Italian government, while the Council was deciding whether to abrogate its decision from January 2010 (Council of the European Union 2010) on the excessive deficit in Italy. The Italian Stability and Convergence Program (SCP) was scrutinized by the Council when it was deliberating on the decision (Council of the European Union 2013).

¹⁰ See EFD (2013, Table 17).

¹¹ The figure is -0.4 percent for 2017. Although it had been presented in the EFD (2013), I omitted it here for homogeneity with respect to other countries’ programs, many of which were limited to the period from 2012 to 2016.

¹² This would also be the most viable choice. In fact, even if the actual multiplier is quite low, if it is higher than the critical value, the increase in government spending required for debt stabilization would be impossibly high.

¹³ It can also be seen that the country which would benefit (or be damaged, in the case of a restriction) the most by these fiscal policies would be Greece, which has a very low initial critical value of the multiplier, while Ireland would experience smaller effects.

Additional information

Notes on contributors

Nadia Garbellini

Nadia Garbellini is a post-doc at the Universitä di Bergamo (Italy).