Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects

This paper studies how the composition of fiscal adjustments influences their likelihood of "success," defined as a long-lasting deficit reduction, and their macroeconomic consequences. We find that fiscal adjustments that rely primarily on spending cuts in transfers and the government wage bill have a better chance of success and are expansionary. On the contrary, fiscal adjustments that rely primarily on tax increases and cuts in public investment tend not to last and are contractionary. We discuss alternative explanations for these findings by studying a full sample of members of the Organization for Economic Cooperation and Development and by focusing on three case studies: Denmark, Ireland, and Italy.