New Analysis on Fiscal Consolidation: Modest Short-Lived Costs, but High-Debt Environments Pose Greater Risks

A recent cross-country analysis indicates that the economic costs of fiscal consolidation are generally modest and temporary, with limited evidence of long-term damage to productive capacity. However, the study reveals a significant asymmetry: fiscal adjustments initiated when public debt is already high tend to be considerably more contractionary. In over half of these instances, the debt-to-GDP ratio remained elevated three years after consolidation, reinforcing the argument for building fiscal buffers before debt levels become critical.