FOR: Better cut spending than raise taxes

The report is a polemic against a famous study by Olivier Blanchard, chief economist of the International Monetary Fund (IMF). The French economist explained in the paper a. o. why the  Greek recession was deeper than expected by the IMF. Blanchard stated that during the crisis, the so-called fiscal multipliers, which had earlier remained stable for a longer time, decreased. A fiscal multiplier demonstrates how much the country’s GDP will grow per one euro of additional public spending.

The authors of the report – Leszek Balcerowicz, Lech Kalina, Aleksander Łaszek and Andrzej Rzońca – explain that fiscal multipliers or too radical belt-tightening are not the actual problem. The problem is a wrong approach to public finance consolidation. Firstly, it came down mostly to tax rises instead of combining small tax rises, expenditure cuts and structural reform. Secondly, the changes occurred too late. Thirdly, they were insufficient.

The writers emphasise that European countries were going through the crisis in different ways, depending on their economic policy. Countries whose situation is good, such as Sweden, carried out fiscal tightening similar in size to countries that are in a poor financial situation. The fiscal tightening comprised various elements.

Countries that resolved the crisis, carried out most of the fiscal adjustment through expenditure cuts. Countries that have difficulty coping with the crisis, raised taxes and cut investment but reduced their expenditure only to a small extent.

The full report can be found here.