The design of fiscal consolidation measures in the European Union: distributional effects and implications for macroeconomic recovery

Summary

The paper considers the austerity measures introduced in the wake of the financial and economic crisis in the late 2000s in relation to their distributional impact across households and potential effects on aggregate demand. We determine the size, composition and effects of fiscal consolidation using a ‘bottom-up’ measurement strategy and find notable cross-country variation. We show that while richer households tend to bear a greater burden in most countries, combined cuts in public wages and transfers are more likely to affect liquidity constrained households and thereby aggregate demand, casting doubts on the presumed effectiveness of such measures for macro-economic recovery. This suggests that in order to reach robust policy conclusions it is important to consider the distributional patterns of detailed policy measures.