Francesco Mattioli , Bocconi University
Arnstein Aassve, Bocconi University
Nicolò Cavalli, University of Oxford
Benedetta Scotti, Bocconi University
Veronica Toffolutti, Bocconi University
The Great Recession forced several countries into fiscal consolidation. An emerging consensus suggests that tax-based approaches tend to be further inside the Pareto frontier compared to expenditure-based approaches, as they generate larger short-run gaps in output. In this paper, we investigate downstream effects of expenditure-based fiscal consolidation leveraging a rushed reform of the Italian Domestic Stability Pact, introduced in 2011. We find that the unexpected budget tightening for small sized Italian municipalities led to an increase in mortality rates. This effect is driven by a sizeable, instantaneous reduction in welfare expenditure, especially for the old age, in those municipalities affected by the fiscal rule. A broader understanding of the welfare function thus introduces novel opportunity costs to expenditure-based fiscal consolidation. Critical appears to be not only whether budget cuts are preferred to tax increases, but which cuts are chosen within the budget menu.
Presented in Session 45. Policy Issues