WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

We provide new evidence on the effects of fiscal consolidation measures on output, unemployment, income inequality and consumer price inflation. To identify causal impacts, we use a narrative-based instrumental variable strategy drawing on historical records of exogenous fiscal changes motivated by deficit reduction, covering 12 EU countries from 1980 to 2020. Our results for the short to medium run show that fiscal consolidations (a) lower real output; (b) raise the unemployment rate; (c) increase income inequality; and d) reduce consumer price inflation. Contractionary macroeconomic effects are stronger during recessions than during non-recession periods.