Fiscal consolidation and employment interaction effects on economic growth in BRICS countries

Fiscal consolidation is gaining importance as a policy tool amid rising public debt and fiscal strain. Nevertheless, there is disagreement among economists about the macroeconomic effects, especially regarding its interaction with labour-market conditions. Understanding how job challenges coexist with fiscal accommodation in the BRICS economies, and how fiscal consolidation interacts with employment to influence economic growth, is policy-relevant. As part of the present research, the authors analyse the interaction effect of fiscal consolidation and employment on economic growth (GDP) in BRICS countries. The study covers the period from 2000 to 2023 and employs panel data techniques. In addition, the employed estimator here is the Panel Corrected Standard Errors (PCSE), which addresses both cross-sectional dependence and heteroskedasticity. Further, such conditions are common in the interlinked emerging economies, including the BRICS. The latter often leads to inefficient standard errors of the conventional panel estimators. We use a composite index, an average of budget balance, government debt, government expenditure and tax revenue, as a proxy for fiscal consolidation. The model incorporates interaction terms of the fiscal consolidation measures and employment to capture moderating effects. According to the results, the effects of fiscal consolidation on economic growth are not uniform. The direct effects of fiscal consolidation are generally weak or contractionary, while the interaction between fiscal consolidation and employment is positive and significant. The findings suggest that fiscal consolidation promotes growth when the labour market is strong. Economic growth is further enhanced by capital formation and net exports. In contrast, high lending rates hinder economic growth. The study finds that employment is an important transmission channel through which the fiscal policy affects growth. This study contributes to the literature and was designed to generate evidence that policymakers could use to design more growth-friendly and inclusive fiscal adjustment strategies by explicitly modelling the interaction between fiscal consolidation and employment with a PCSE framework suited to the interdependent BRICS.