Acta academica karviniensia 2016, 16(1):17-29 | DOI: 10.25142/aak.2016.002

THE EFFECTS OF FISCAL CONSOLIDATION ON NATIONAL ECONOMY: THE DEBATE OVER REDUCTION OF BUDGET DEFICIT AND DEBT

Pavel Breinek

Mendelova univerzita v Brně, Provozně ekonomická fakulta, Zemědělská 1, 613 00 Brno, Email:breinek@node.mendelu.cz

The reduction of public debt has become important task for many national governments. Sustainability of public finance is frequently conditioned by cutting budget deficits, i.e. raising tax burden and/or reducing government expenditure. Countries have to implement large fiscal consolidation to avoid fiscal crises and encourage future growth. However, the fiscal tightening can suppress the growth of actual product and delay the improvement of fiscal indicators. The goal of this article is to present the possible effects of fiscal consolidation on national economy. On the basis of literature review we will try to summarize current discussion and highlight the main problems of design and implementation fiscal consolidation. The successful reform of public finance should be expenditure based and changes of government spending and taxes should be permanent. The economic boom is probably better period for fiscal consolidation then recession. And timing of received fiscal measures seems to be also important. The responses of central bank and possibility of currency depreciation can also play crucial roles. Finally, the successful fiscal consolidation can depend on institutional arrangement of economy or structural policy and income policy.

Keywords: budget deficit, economic growth, fiscal consolidation, fiscal policy, government debt, government spending, taxes

JEL classification: E62, H60, H62

Received: January 13, 2016; Accepted: May 26, 2016; Published: March 30, 2016  Show citation