Alesina on austerity: round 2

By James Zuccollo 21/01/2015

Alberto Alesina has returned to the fray with a new paper that shows how tax rises are far more damaging than tax cuts. With a new dataset covering the recessionary years, this is the most up-to-date evidence on fiscal consolidation available. Importantly, they are unable to discern evidence that the ZLB caused the effects of fiscal policy to be greater. Of course, this isn’t the final word and it’s only one piece of evidence, but I’ll be reading it closely over the next few days.

Fiscal adjustments based upon cuts in spending appear to have been much less costly, in terms of output losses, than those based upon tax increases. The difference between the two types of adjustment is very large. Our results, however, are mute on the question whether the countries we have studied did the right thing implementing fiscal austerity at the time they did, that is 2009-13.