Austerity versus Development*

*Paper written for presentation at the ā€œInternational Conference on Management and Economic Policy for Developmentā€, Kozminski University, Warsaw, 10-11 October 2013.

This paper shows that, if the fiscal multiplier is greater than the inverse of the Public Debt/GDP ratio, fiscal consolidation necessarily raises instead of lowering the Public Debt/GDP ratio with respect to what it would have been without consolidation. This appears to be the case for all or nearly all of advanced countries, assuming national multipliers equal to the newly revised average. Fiscal consolidation reduces the Public Debt/GDP ratio only in the least indebted countries that do not need such a reduction. Consolidation makes debt less rather than more sustainable, consequently making necessary further fiscal consolidation, activating a vicious circle. Finally, the maintenance and growth of a gap between potential and effective income discourages investment and slows down both potential and actual growth.

austerity-vs-development.pdf428.34 KB