Total factor productivity (TFP) and fiscal consolidation: How harmful is austerity?

Departing from the expansionary austerity literature, this study assesses empirically whether fiscal consolidation propagates changes in supply side of economy that can potentially influence total factor productivity (TFP). Using a panel dataset 26 OECD countries over period 1980–2016 and employing vector autoregressive cointegration techniques, we present evidence both short-run long-run negative effects on TFP. The impact is disproportionately more damaging for TFP low debt countries, while, contrary to thesis, our empirical results would advise against spending-driven consolidation, since such undermines capacity, due importance government spending shaping productive capital. Our have serious policy implications implementation design adjustment programmes. • We investigate influences productivity. Estimation based data analysis 1980–2016. Fiscal has short- long-run. Austerity low-debt countries. Public vital capital, hence harmful.