Debt and austerity: international evidence and the case of Brazil by Alberto Alesina and Pierfrancesco Mei published by Revista Cadernos de Finanças Públicas (3/2020)
“The term austerity indicates a policy of sizable reduction of government deficits and stabilization of government debt achieved by means of spending cuts or tax increases, or a combination of both. In this paper we ask two questions with an eye on the case of Brazil: what type of austerity policies can achieve the fiscal goals at the lowest costs in terms of output growth, and what are the electoral effects for governments implementing them? If governments followed adequate fiscal policies most of the time, we would almost never have a need for austerity. Economic theory and good policy practice suggest that a government should run deficits during recessions – when tax revenues are lower and government spending is higher due to the working of fiscal stabilizers such as unemployment subsidies. These deficits should then be balanced by surpluses during booms, when spending needs are lower. Instead, governments often do not that. They run deficits during recessions but they do not accumulate surpluses during booms. In many Latin American countries they even follow countercyclical fiscal policies – namely, they run even bigger deficits during expansions than during recessions. As a result, debt grows up to the point of un-sustainability, and then a fiscal adjustment becomes necessary to avoid a meltdown…”
