The phrase "a fiscal contraction" is correct and usable in written English.
It can be used to describe a situation where there is a reduction in government spending or a decrease in the fiscal budget.
Example: "The government's decision to implement a fiscal contraction has raised concerns about its impact on public services and economic growth."
Alternatives: "a budget cut" or "a reduction in fiscal policy".
However one feels about the cuts themselves, the default path for fiscal policy is a fiscal contraction of 2.5% heading into 2011, and that would represent a serious headwind for the economy.
This implies a fiscal contraction of about 2% of GDP.
If, in addition, everyone else is cutting, the effect of a fiscal contraction is further magnified.
A new ECB working paper argues that "a fiscal contraction may turn out to be expansionary if the expectation channel becomes sufficiently strong".
In fact, they reckon that a fiscal contraction worth 1% of GDP typically cuts output by about 0.5% after two years.
"In response to the positive growth and re-inflation that occurred after devaluation and suspension of gold convertibility, the Fed raised reserve requirements, the Treasury sterilised gold inflows, and there was a fiscal contraction.
So while it would be wrong to fault Moody's for correctly pointing out that weak growth means the chancellor, George Osborne, is much less likely to hit his debt targets, it is worth asking exactly why it ever thought such a sharp fiscal contraction was a good idea in the first place?
If Athens deflates and adopts a draconian fiscal contraction, social unrest looms on a far greater scale than this week's street riots on the first anniversary of a police shooting that killed a student.
"By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk," he said.
To avoid a calamitous fiscal contraction, he and Republicans will strike a deal to step back from the cliff.
Unlike Greece and Ireland who are stuck in monetary union, the UK coalition government voluntarily decided to run the experiment to see if there is such a thing as an "expansionary fiscal contraction".
