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The (Subjective) Well-Being Cost of Fiscal Policy Shocks
Author:
Kodjovi M. Eklou null

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Mamour Fall null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2020: Issue 005
Language:
English
Publication Date:
17 Jan 2020
DOI:
https://doi.org/10.5089/9781513525846.001
ISBN:
9781513525846
ISSN:
1018-5941
Pages:
47
Keywords:
WP; public goods; well-being cost; inflation rate; fiscal policy shock; substitution effect; effect of fiscal consolidations; dampening effect; spending cut size; recessionary effect; Fiscal consolidation; Income inequality; Consumption taxes; Active labor market policies; Europe; Fiscal Consolidations; Subjective Well-Being; Spending cuts; Tax hikes
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Do discretionary spending cuts and tax increases hurt social well-being? To answer this question, we combine subjective well-being data covering over half a million of individuals across 13 European countries, with macroeconomic data on fiscal consolidations. We find that fiscal consolidations reduce individual well-being in the short run, especially when they are based on spending cuts. In addition, we show that accompanying monetary and exchange rate policies (disinflation, depreciations and the liberalization of capital flows) mitigate the well-being cost of fiscal consolidations. Finally, we investigate the well-being consequences of the two well-knowns expansionary fiscal consolidations episodes taking place in the 80s (in Denmark and Ireland). We find that even expansionary fiscal consolidations can have well-being costs. Our results may therefore shed some light on why some governments may choose to consolidate through taxes even at the cost of economic growth. Indeed, if spending cuts are to generate a large well-being loss, they can trigger an opposition and protest against a fiscal consolidation plan and hence making it politically costly.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund