The distributional effects of fiscal austerity

Financial crises are typically associated not only with sharp economic downturns but also with a substantial deterioration of fiscal positions (Reinhart and Rogoff, 2009). Declining revenues owing to weaker economic conditions, higher expenditures associated with bailout costs and demand stimuli have historically led to a rapid deterioration of fiscal balances and a significant and long-lasting increase of public debt. In particular, looking at past historical episodes of severe financial crises, Furceri and Zdzienicka (2012) find that the debt-to-gross domestic product (GDP) ratio has typically increased by about 35 percentage points compared with pre-crisis trends, with the effect lasting for about 10 years.

Related Subject(s): Economic and Social Development