The Modality of Fiscal Consolidation and Current Account Adjustment

27 Pages Posted: 4 Aug 2015

See all articles by Antonis Adam

Antonis Adam

University of Ioannina - Department of Economics

Thomas Moutos

Athens University of Economics and Business - Department of International and European Economic Studies; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: July 31, 2015

Abstract

In this paper we argue that supply-side adjustments (i.e. the reallocation of productive resources between the traded and non-traded sectors) can be an important determinant of the output costs of current account adjustment. The argument relies on the fact that tax evasion is more prevalent in the non-traded sector, which is dominated by services and the self-employed. Heavy reliance on tax-based fiscal consolidations induces a reallocation of economic activity towards the non-traded sector, thus requiring a larger decline in domestic absorption (and output) per unit of improvement in the current account balance. Using IMF data for the period 1980-2011 we find that budget consolidations which rely more on tax increases than on spending decreases will be associated with larger output costs per unit of current account improvement.

Keywords: current account adjustment, fiscal consolidation, sacrifice ratio, tax evasion

JEL Classification: E620, F320, F410

Suggested Citation

Adam, Antonis and Moutos, Thomas, The Modality of Fiscal Consolidation and Current Account Adjustment (July 31, 2015). CESifo Working Paper Series No. 5451, Available at SSRN: https://ssrn.com/abstract=2639112 or http://dx.doi.org/10.2139/ssrn.2639112

Antonis Adam

University of Ioannina - Department of Economics ( email )

45110 Ioannina
Greece
(+30)2651097437 (Phone)

HOME PAGE: http://users.uoi.gr/aadam

Thomas Moutos (Contact Author)

Athens University of Economics and Business - Department of International and European Economic Studies ( email )

76 Patission Street
GR-10434 Athens
Greece

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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