Fiscal Consolidation: Taking Stock of Success Factors, Impact, and Design

ABSTRACT Surges in public debt in many countries since the COVID‐19 pandemic have rekindled interest in fiscal consolidations, which often entail difficult policy choices in the face of economic and political constraints. This paper presents a comprehensive survey of findings from the literature on fiscal consolidations, focusing on the success factors, consequences, and design aspects of past consolidation episodes. This survey shows that consolidations have a success rate between one‐fifth and tow‐third and often result in output losses and deteriorating income distribution in the short run. However, odds of success are higher when the consolidation is supported by favorable global and domestic environment, strong fiscal institutions, and broad‐based political support and effective communication. Policymakers face difficult trades‐offs in determining the size, pace, and phasing of a consolidation program, but it is important to safeguard public investment and protect social spending which would help mitigate short‐term impact and improve the prospect for long‐term growth.