Fiscal consolidation and public debt

Abstract

High public debt is urging policy makers to consider strategies to rebuild buffers and preserve debt sustainability. We study whether—and under which conditions—fiscal consolidation is likely to be associated with a durable reduction in public debt to GDP ratios. Our findings based on a sample of advanced and emerging countries indicate that the average fiscal consolidation has a minimal effect. However, discretionary consolidations (or an increase in the primary balance to GDP beyond what is driven by business cycle considerations) implemented during economic upturns or in scenarios where they can “crowd in” private investment, are likely to be associated with sustained reductions in debt ratios.