Using the Devries et al. (2011) database for European countries, Turrini (2013) finds a temporary impact of fiscal consolidation on cyclical unemployment, which is mainly due to expenditure measures and is higher for countries with lower employment protection.
73 The Organization for Economic Co-operation and Development in 2010 reported that the impact of fiscal measures aiming to change behaviors may be unpredictable; because the price elasticity of demand varies across individuals and population groups, these measures can bear more heavily on low-income groups than on those with higher incomes, and substitution effects are not always obvious.
That is big but not excessive for a block that is forecast by the European Commission to have an average budget deficit of 6.6% of GDP in 2010.There is much uncertainty about the economic impact of fiscal tightening, not least because some temporary measures will also have run their course by next year.
With the proportion that high, the effect of consumers' attempts to reduce debts (see yesterday's post) may overwhelm the impact of fiscal reflation packages, no matter how large they sound in dollar terms.
Although increasing in number, studies on the impact of fiscal consolidations on employment are still few (Daly et al. 2013; Turrini 2013; Jalles 2014; and Woo et al. 2013), and, to our knowledge, only one study has at present examined the implication of consolidations or expansions on the Okun's Law.
As inventory adjustments and fiscal incentives end and the impact of fiscal stimulus wanes, the economy might fall back into lower growth sometime in 2010 as the drivers of the recent economic boom--the consumer, the housing sector and easy credit--will remain under pressure.
In Greece, for example, measures intended to lower the debt burden have in fact left the country more burdened than it was in 2010: the debt-to-GDP ratio has increased, owing to the bruising impact of fiscal austerity on output.
"The difficult year may well be 2013, when newly elected or re-elected governments have to wrestle with the impact of fiscal and monetary stimuli and the failure to deal quickly enough with fiscal debts," said WPP.
Normally, monetary policy offsets some of the impact of fiscal policy.
But questions have been asked about the impact of fiscal austerity on Mr Cameron's grand vision.
There are several reasons one might expect the negative impact of fiscal consolidation on growth to be greater now.
