Effectiveness and counter-cyclicality of fiscal consolidation under compliance regulation: The case of the Stability and Growth Pact

Article  -  Thursday, 17 November 2022

Helmut, H. and Theilen, B. (2022): "Effectiveness and counter‐cyclicality of fiscal consolidation under compliance regulation: The case of the Stability and Growth Pact", Economics & Politics

We examine the effect of the Stability and Growth Pact (SGP) on fiscal adjustments. Three alternative measures of budget cuts are considered: i) narratively identified fiscal adjustments whose main objective is to reduce the budget deficit, ii) the primary budget balance and iii) the structural budget balance. The database includes information from the period 1980-2014 for 17 economies, of which 10 fall under the SGPs' regulations. The SGP is analyzed with respect to its effectiveness, its cyclicality and the type of fiscal adjustments (tax increases versus spending cuts).

The results of the study indicate that the SGP has effectively promoted the budgetary consolidation measures identified through the narrative approach, while it had no overall impact on the primary balance and a smaller overall impact on the structural budget balance. However, the effectiveness of the SGP has varied considerably over time. All measures indicate that the SGP was particularly effective in the period after the introduction of the euro, except for the 2 years after the 2008 financial crisis. We find no evidence that fiscal policy has become more procyclical under the SGP.

Finally, the fiscal consolidation under the SGP favors spending cuts, whereas the application of tax hikes shows no sizeable differences as compared with the reference group

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