The term fiscal adjustment refers to all those policies implemented by a government to achieve a future stable economic orthodoxy, i.e. to improve the fiscal balance by drastically reducing the annual state budget deficits.
The reduction of the state budget deficit must reach the level of 1.5% of GDP or 1.5% of GDP as a surplus and within a period of one year (Alesina, Perotti & Tavares publication 1998, “The Political Economy of Fiscal Adjustments, 1998, Brooking Papers on Economic Activity 1998, vol. 29, issue 1, 197-266).
by Thanos S. Chonthrogiannis–https://www.liberalglobe.com
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The criteria of success or failure
A budget adjustment is considered successful if the following are true:
1. The average of the budget balance for three consecutive years after the end of the fiscal adjustment shall be 2% higher than the year in which the fiscal adjustment was implemented.
2. The ratio of Government Debt (GD) to Gross Domestic Product (GDP), (GD/GDP), of the country in which the fiscal adjustment was applied and three years after the end of the fiscal adjustment, to be at least 5% lower in relation to the corresponding ratio (GD / GDP) in force in the year in which the fiscal adjustment was implemented.
In order for a fiscal adjustment to be successful, both of the above conditions must apply at the same time, otherwise the fiscal adjustment is considered a failure.
How fiscal adjustment is achieved
Given that the aim of a fiscal adjustment is to reduce budget deficits and achieve surpluses, the tools available to governments are either (and always depending on the case) a drastic reduction in public spending (e.g. for salaries of civil servants or better dismissals of civil servants, public investments, expenditures for education, health, defense, etc.) and/or the parallel increase of public revenues through the increase of indirect and direct taxation.
A rapid and successful fiscal adjustment should be based on drastically reducing public spending on the annual state budget and not on raising taxes which will reduce revenues, suspend investment and reduce demand and consumption in the economy.
The results of the fiscal adjustments
To judge whether the results of fiscal adjustments have been achieved we need to look at the macroeconomic environment, which is characterized by the following variables:
1. GDP and the rate of change of GDP.
2. Annual unemployment levels.
3. The rate of change of public and private investments.
4. The trade balance.
5. The rate of change of private consumption.
So to have a complete picture, we need to look at the above variables in the following three different time periods.
1st period
Three years before the start of fiscal adjustment.
2nd period
The year/years in which the financial adjustment applies.
3rd period
Three years after the end of the fiscal adjustment.
What one should expect when researching the above data is that in the first period there will be a relatively low increase in the rate of change of GDP. The fiscal year (s) of fiscal adjustment should be expected to see a strong increase in the rate of change in GDP.
In the 3rd period the rate of change of GDP will be stable but at slightly higher levels than the first period under consideration.
The same goes for the variables other than unemployment which should move inversely depending on the variables of GDP and its rate.
