The Design of Fiscal Adjustments

This paper offers three results. First, in line with the previous literatureweconfirm that fiscal adjustment based mostly on the spending side are less likely to be reversed. Second, spending based fiscal adjustments have caused smaller recessions than tax based fiscal adjustment. Finally, certain combinations of polcies have made it possible for spending based fiscal adjustments to be associated with growth in the economy even on impact rather than with a recession. Thus, expansionary fiscal adjustments are possible. 1