Description

Amid renewed crisis, falling tax revenues, and rising debt, Ukraine faces serious fiscal
consolidation needs. Durable fiscal adjustment can support economic confidence and rebuild
buffers but what is its overall impact on growth? How effective are revenue versus spending
instruments? Does current or capital spending have a larger impact? Applying a structural
vector autoregressive model, this paper finds that Ukraine’s near-term revenue and spending
multipliers are well below one. In the medium-term, the revenue multiplier becomes
insignificant (with a wide confidence interval) and the spending multiplier strengthens. Capital
and current spending have a similar effect on growth but the capital multiplier remains
significant for longer. These results suggest near-term consolidation based on a combination
of revenue and spending measures would have a modest impact on growth. At the same time,
medium-term policies could minimize the adverse consequences of consolidation on growth
by offsetting some current spending cuts with increased capital spending. Given the severe
challenges facing the Ukrainian economy, it is important that policymakers apply these results
in conjunction with broader considerations such as public debt sustainability, investor
confidence, credibility of government policies, and public spending efficiency. Consequently,
it may be necessary to rely more on current spending cuts over other types of consolidation
measures even though multiplier estimates suggest a more diverse combination of measures.

More publications in this series: Working Papers

More publications by: Pritha Mitra ; Tigran Poghosyan