Fiscal consolidation during the pandemic

Abstract

In connection with the increase in public debt induced by the growth of government expenditures aimed at reducing negative effects of the global pandemic, the analysis of such policy measures as fiscal consolidation is an urgent issue. In this paper, we analyze gains and losses of fiscal consolidation aimed at gradually reducing government debt to pre-pandemic levels by raising taxes. Within the framework of the global multi-regional general equilibrium model with overlapping generations (CGE-OLG), we consider scenarios of local (single region) and global consolidation. As a result, we have found that local consolidation leads to insignificant losses in terms of output in the Russian economy in the short term and to more significant losses in developed countries, whose budgetary expenditures were significantly higher during the pandemic. In the long run, there is a positive effect on the level of output in all economies. Another important result is the additional positive effect of global consolidation giving higher output values compared to local consolidation.