Is fiscal austerity a drag on growth? | tutor2u Economics

Keynes was right after all when he said: ‘The boom, not the slump, is the right time for austerity at the Treasury.’ That is the conclusion of research by Professors Òscar Jordà and Alan Taylor, published in the February 2016 issue of the Economic Journal.

Their results indicate that only a strong economy can bear a programme of austerity or ‘fiscal consolidation’ without significant output losses. According to their analysis, a fiscal consolidation of 1% of GDP translates into a loss of 3.5% of real GDP over five years when implemented in a slump, rather than a loss of just 1.8% in a boom.

Their results contrast with the ‘expansionary austerity' view of Alberto Alesina and Silvia Ardagna, and amplify the opposing ‘contractionary austerity’ view of the International Monetary Fund.

The researchers apply their estimates to make a counterfactual forecast of the post-2007 path of the UK economy without the fiscal austerity policies imposed by the coalition government after the 2010 election.

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