The design of fiscal consolidation measures in the European Union: Distributional effects and implications for macroeconomic recovery

The financial and economic crisis which started in the late 2000s and the fiscal consolidation measures to counter the subsequent government budget deficits have an impact on household income distribution and macroeconomic recovery. We consider the austerity measures in relation to their distributional impact and the potential channels through which fiscal consolidation can affect economic growth. We find notable variation in the size, composition and effects of fiscal consolidation. Richer households tend to bear a greater burden in most countries but spending cuts are more likely to affect liquidity constrained households casting doubts over previous findings in the macro-economic literature about the effectiveness of such measures. This suggests the need to consider more disaggregated evidence to reach robust policy conclusions.