1. HOW MUCH IS A LOT? FISCAL ADJUSTMENTS IN
PERSPECTIVE
Julio Escolano, Laura Jaramillo, Carlos Mulas-Granados, Gilbert Terrier 27 February
2015
Fiscal consolidation is back at the top of the policy agenda. This column provides
historical context by examining 91 episodes of fiscal consolidation in advanced and
developing economies between 1945 and 2012. By focusing on cases in which the
adjustment was necessary and desired in order to stabilise the debt-to-GDP ratio, the
authors find larger average fiscal adjustments than previous studies. Most consolidation
episodes resulted in stabilisation of the debt-to-GDP ratio, but at a new, higher level.
High public debt is one of the legacies from the Great Recession that is becoming a
pressing issue in the wake of the economic recovery. According the latest IMF’s Fiscal
Monitor (October 2014) the public debt ratio of the G-7 is close to 120 percent of GDP
and that of the group of advanced economies near 106 percent of GDP. The Euro area as
a whole is estimated to have finished 2014 with an average public debt ratio equivalent
to 96 percent of GDP. Five years of strong fiscal efforts have stabilised aggregate debt
levels, but today, several countries still face the challenge of restoring debt sustainability
by continuing with their fiscal adjustment plans.
In this context, the debate around fiscal consolidation is far from over. The VoxEU debate
“Has Austerity Gone Too Far?” (Corsetti 2012) has been reflecting the conflicting
positions. While some contributors have focused on the characteristics of the fiscal
consolidation needed to bring public debt down from historically high levels (Buti and
Pench 2012), others have examined the effects of alternative strategies on economic
performance (Van Reenen 2012 and Cottarelli 2012) which tend to be more negative in
the presence of credit constraints which typically follow financial crises (Baldacci et al.
2013a and 2013b). Adjustment fatigue is setting in within some of the countries hardest
hit by the crisis, but the debate about the feasibility of large and sustained fiscal
adjustment has also become heated in other countries.
Putting fiscal consolidation in context
In this debate, a crucial question remains to be answered: How much fiscal adjustment is
a lot? To answer this question, a relevant angle is to look at what size of fiscal adjustment
has been actually feasible in the past. Answering this question is precisely the subject of
our latest paper (Escolano et al. 2014). In this contribution we take stock of past
consolidation episodes in terms of the size of fiscal adjustments, their duration, and the
factors that have accompanied such adjustments.
Our approach adds to the existing literature in several ways.

2. First, we draw lessons from a broad set of consolidation episodes by looking at both
advanced and developing countries, and including a time period that spans from 1945 to
2012.
Second, we make a very careful selection of the relevant episodes by choosing
consolidation episodes where countries needed and wanted to adjust in order to stabilise
the debt-to-GDP ratio.
This is a major novelty, since most papers in the literature looked at the characteristics
(size, duration, composition, etc.) of all improvements in the primary balance, regardless
of whether the country really needed and wanted to adjust.
This choice by previous authors played down the average size achieved by past
adjustments. Instead, we looked at those episodes in which countries had large primary
gaps (defined as the difference between the actual primary balance and the level of
primary balance that would stabilise the debt-to-GDP ratio); and selected only those cases
in which countries went beyond pure intentions and showed consistent reductions in their
cyclically adjusted primary deficits.
Looking at this set of 91 consolidation episodes that occurred in advanced and developing
economies between 1945 and 2012, we found that in most cases fiscal adjustments were
sizable and larger than previously identified by other studies. In at least half of the
episodes, countries managed to improve their primary balance by 5.4% of GDP (4.8% of
GDP in cyclically adjusted terms). And in 25% of cases, the size of the overall deficit
reduction was around 8% of GDP.
Debt stabilisation at new, higher levels
The size of the fiscal adjustment implemented during those episodes was enough to close
the primary gap in two-thirds of cases (see Figures 1 and 2). This implies that debt
stabilised, and in most cases was put on a downward trend. But debt-to-GDP ratios did
not return to initial levels. While countries kept primary balances well above those
observed before the adjustment episode, they did not sustain primary balances at the
highest levels for prolonged periods of time. This suggests that countries tend to make
substantial efforts to stabilise debt but, once this is achieved, they cease consolidation
efforts and do not necessarily seek to get back to the lower initial debt-to-GDP ratio.
… http://www.voxeu.org/article/debt-and-fiscal-adjustment-historical-evidence