Fiscal consolidation in EU countries in the nineties: New facts and policy implications

Maria Gabriella Briotti

The paper takes stock of the theoretical and empirical findings presented in the survey paper to analyse the experience of fiscal consolidation in the EU countries in the nineties. The paper presents stylised facts of the fiscal consolidation process in EU countries over the 1990s. The observation of the budgetary adjustments in EU countries, shows that revenue based adjustments have generally preceded expenditure based adjustments. The paper claims that in the choice of policy adopted convergence of budget structure and awareness of their impact on a country's competitiveness played a role. Hence, initial budget conditions have influenced the choice of policies. The paper also claims that in the run up to EMU, fiscal consolidation might have had less detrimental short run effects on growth. By a logical argument, the paper points to the new institutional framework of budget discipline enshrined by the Maastricht Treaty fiscal consolidation, which may have increased the credibility of governments regarding their commitment to comply with the fiscal parameters requirement. Hence, intertemporal effects of fiscal policy might have become more relevant, thus strengthening potential positive wealth effects of fiscal consolidation. Furthermore, budget adjustments were sizeable and might have caused people to switch their expectations about future policies. In this respect, the paper produces some descriptive evidence that tax based consolidation might have been more detrimental for growth than expenditure based adjustment.