FLASH · Heterogeneous Effects of Fiscal Consolidation on Firms' Balance Sheets
Horizon 2020 — Marie Skłodowska-Curie Actions
- Duration
- 2017-09-01 → 2019-11-14
- EU contribution
- €183,455
- Participants
- 1
- Scheme
- MSCA-IF
Lines connect the coordinator with its partners.
Results in brief
Heterogeneous Effects of Fiscal Consolidation on Firms' Balance Sheets
What is the problem/issue being addressed? Despite major and sustained fiscal adjustments made in recent years to bring debt down to safer levels in the face of a weak recovery, many OECD countries still need substantial fiscal consolidation to put public finances back on a sustainable path. The design of fiscal adjustments and its macroeconomic effect has been extensively investigated in the literature. However, existing studies have focused on aggregate level data and have failed to consider the heterogeneous effects that fiscal consolidation might have on the economic performance of the business sector. Project FLASH aims to evaluate the short-term effects of fiscal consolidation on the real and financial activities of firms of different characteristics. FLASH provides novel empirical evidence on the transmission of fiscal shocks to the firm's employment, investment, and balance sheets. In addition, FLASH evaluates how firms with different characteristics respond to changes in average versus marginal tax rates. Why is it important for society? A credible fiscal adjustment strategy would be expected to consider the business sector response. Project FLASH highlights the important role of financial frictions in determining the impact of fiscal consolidation on firms' performance. Because financial frictions affect differently firms of different sizes, the effects of fiscal consolidation are likely to be heterogeneous across firms. An important policy implication of FLASH is about how best to design fiscal consolidation for small and large firms as well as for financially constrained and unconstrained firms. What are the overall objectives? Using CompNet and Compustat datasets, narrative identification and MTR's simulation, and Panel VARX methods, the overall objectives of FLASH are twofold: (1) to develop a research programme in the design, implementation and evaluation of fiscal consolidations plans and investigate the relative importance of tax increases on Firms' balance sheets, and (2) to explain the possible mechanisms that drive differential responses by small and large firms to fiscal adjustments. The project has achieved most of its objectives and milestones for the period, with relatively minor deviations.
Data: CORDIS, © European Union
Project objective
The global financial crisis and slow ensuing recovery have put severe strains on the fiscal positions of many OECD countries, raising serious concerns about fiscal sustainability, especially in the Euro Area. The challenge facing these countries is how to bring debt down to safer levels in the face of a weak recovery. Several EU governments undertook large fiscal consolidations plans that involved a combination of spending cuts and tax hikes, aiming at sustainably reducing public deficits and debt. Although the effects of fiscal consolidation on output and unemployment have been extensively investigated, existing studies have focused on aggregate level data and have failed to consider the heterogeneous effects that fiscal consolidation might have on the economic performance of the business sector. This omission, due in large part to the scarcity of firm-level data capturing how firm’s assets and liabilities are affected by fiscal consolidation, restricts our knowledge about how fiscal adjustments impacts economic performance. Making use of yet unexplored detailed firm level data and a range of econometric methods, FLASH will provide novel and robust empirical evidence on the causal impact of fiscal consolidation on the real and financial activities of different sized firms. Specifically, FLASH will pursue the following research objectives to explore the heterogeneous effects of fiscal consolidation on firms' balance sheets: Examine the causal effect of fiscal consolidation on firms' performance; Examine if the composition of fiscal consolidation (spending versus taxes-based) matters for firms; Examine how differently do small and large firms respond to fiscal consolidation; Examine if the effects of fiscal consolidation on real (Investment, Sales and Employment) and financial (Debt, Cash-holding, Dividend and Equity) activities are heterogeneous across firms; Create a network and disseminate results to a broader audience.
Original text from CORDIS.
Participants
- UNIVERSITY OF YORK · YORK NORTH YORKSHIRECoordinatorUnited Kingdom
Links
Data: CORDIS, © European Union