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Self-defeating austerity? Assessing the impact of a fiscal consolidation on unemployment

Published online by Cambridge University Press:  01 January 2023

João Carlos Lopes  and
João Ferreira do Amaral
João Carlos Lopes*
Affiliation:
Universidade de Lisboa, Portugal
João Ferreira do Amaral
Affiliation:
Universidade de Lisboa, Portugal
*
João Carlos Lopes, Instituto Superior de Economia e Gestão, Universidade de Lisboa, Rua Miguel Lupi, n° 20, 1200-781 Lisboa, Portugal. Email: jcflopes@iseg.ulisboa.pt
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Abstract

The great recession of 2008/2009 had a huge impact on unemployment and public finances in most advanced countries, and these impacts were magnified in the southern Euro area by the sovereign debt crisis of 2010/2011. The fiscal consolidation imposed by the European Union on highly indebted countries was based on the assumptions of so-called expansionary austerity. However, the reality so far provides proof to the contrary, and the results outlined in this article support the opposing view of a self-defeating austerity. Based on a model of the input–output relations of the productive system, an unemployment rate/budget balance trade-off equation is derived, as well as the impact of a strong fiscal consolidation based on social transfers and the notion of a neutral budget balance. An application to the Portuguese case confirms the huge costs of a strong fiscal consolidation, both in terms of unemployment and social policy regress. The conclusion is that too much consolidation in anyone year makes consolidation more difficult in the following year.

Keywords

C67E23E62Austerityfiscal consolidationinput–output analysisPortugalself-defeating austerityunemployment
Type
Workers and neoliberalism
Information
The Economic and Labour Relations Review , Volume 28 , Issue 1 , March 2017 , pp. 77 - 90
Copyright
Copyright © The Author(s) 2017

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