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DOES FAIRNESS MATTER FOR THE SUCCESS OF FISCAL CONSOLIDATION?

 

Georgia Kaplanoglou

University of Athens

 

Vassilis T. Rapanos

University of Athens

 

loanna C. Bardakas

Bank of Greece

 

 

ABSTRACT

Does it matter for the success of fiscal consolidation programmes that they are fair? This question has never been empirically addressed despite its profound importance especially since many developed countries have embarked on fiscal consolidation programmes, which in many cases have led to sizeable increases in unemployment and poverty, and are met with public dissatisfaction. Using a data set for 29 OECD countries over the period 1971-2009, we argue that fairness matters, namely that improving the targeting of social transfers and their effectiveness in terms of poverty alleviation, higher public expenditure on training and active labor market policies and programmes like social housing directed to the poor, even decreasing the VAT rate on necessities, improve the success probabilities of consolidation attempts. Introducing such concerns sheds new light on the prevailing view that the successful fiscal adjustments are those that rely on spending-cuts rather than on tax increases. The results of this paper provide empirical evidence that ameliorating the effects of adjustment, by supporting the weaker parts of society, is crucial for the success of fiscal consolidations and argues that "fair fiscal adjustments" may provide the double dividend of enhancing the probability of success of the adjustment and of promoting social cohesion.

 

JEL classifications: D63, E62, H23, H53, H50, H62, I38

Keywords: fiscal consolidation; success; fairness; expenditure; social transfers

 

Acknowledgements: We are grateful to Tony Atkinson, David Newbery, Elias Papaioannou and Heather Gibson for their insightful comments. The views of the paper are our own and do not necessarily reflect those of the Bank of Greece. All remaining errors are ours.

 

Correspondence:

loanna C. Bardakas

Economic Analysis and Research Department

Bank of Greece,

21 El. Venizelos Av.,

10250 Athens, Greece

Email: impardaka@bankofgreece.gr

Tel.:0030-210-3202397

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