In response to increasing debt paths, governments often implement fiscal consolidation programs. This paper studies the impact of these programs on the composition of government spending. System-GMM estimations performed on a sample of 53 developed and emerging countries over 1980–2011 reveal that fiscal consolidations significantly reduce the government investment-to-consumption ratio, i.e. a composition effect. Robust to a wide set of tests, including when using the narrative approach to identify fiscal consolidations, this significantly stronger contraction of government investment with respect to government consumption is at work particularly when debt is high and in the low phase of the economic cycle. Therefore, in such contexts, fiscal consolidations aimed at short-run stabilization may hurt the economy in the long-run through their detrimental effect on public investment, calling for a reflection upon how they could be re-designed to allow avoiding such undesirable consequences.

Additional Metadata
Keywords Fiscal consolidation, government consumption, government investment
Persistent URL dx.doi.org/10.1080/00036846.2019.1676392
Journal Applied Economics
Citation
Bamba, M. (Moulaye), Combes, J.-L. (Jean-Louis), & Minea, A. (2019). The effects of fiscal consolidations on the composition of government spending. Applied Economics. doi:10.1080/00036846.2019.1676392