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JEL Code

E12, F15, F41, H21, H87, E52, E58, H68, H25, H30, H51

Abstract

Since World War II, raising public spending has been one of the main policies to address recessions. A wealth of literature about austerity and fiscal consolidation has been published to analyze the different fiscal stabilization plans executed by several countries worldwide. This paper aims to demonstrate that fiscal plans based on spending cuts are more effective in achieving public finance equilibrium and boosting growth and employment. We focus the analysis on four examples: Germany, Ireland, Spain, and Chile, and reach three conclusions. First, countries where excessive deficit has been avoided register stronger economic stability and sustainability than countries with fiscal imbalances. Second. We show empirical evidence that fiscal stabilization plans based on spending cuts are more effective than raising taxes. Third. In times of critical fiscal stress, raising taxes and cutting spending may be needed to make fiscal stabilization plans more effective. Tax policies cannot be based on raising revenues at any cost. Overall, we show overwhelming evidence that constant deficit and spending increases generate negative fiscal multipliers, making the economy less productive and reducing GDP growth potential.

Submission Date

5-30-2021

Approval Date

6-10-2021

Publication Date

6-30-2021

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