Effects of Fiscal Consolidation in the OECD

# _d)_ **_The Cnton_** _Budget_

This section uses the stylization of the Clinton Budget discussed above to simulate the global impacts of this particular fiscal package<sup>4</sup> . Figures 9 and 10 illustrate the consequences for the same range of variables as considered above. Three lines are shown on each figure. The solid line is the OBRA-93 (or Clinton budget). The dashed line is the outcome for of the Maastricht simnulation. The thick dashed line is the combination of both the Clinton budget and the Maastricht scenarios. These other results will be discussed below.

Figure 9 shows that the stylized representation of the Clinton Budget reduces level of U.S. GDP relative to baseline from 1993 through 2002'. The growth rate (seen from the slope of the GDP line) falls from 1993 through 1997 but rises above baseline after 1997. This pattern is also reflected in the paths for private consumption and investment. This model projects a decline in the interest rate on 10 year bonds of about 120 basis points in 1993, followed by additional declines in the following years. The budget package also leads to a'depreciation of the effective value of the US dollar by around 7 percent on impact. This depreciation together with the contraction of domestic demand improves the U.S. trade balance by 0.5 percent of GDP in 1993. The Clinton Budget also improves the U.S. share market by 3 percent in 1993. This is despite the fall in real GDP but is because of the rise in bond prices (or fall in real and nominal interest rates). Despite the share market rise, private investnent remains weak because of lower demand acting to constrain liquidity constrained finns that invest out of retained eamings.

The transmission of the Clinton budget to other countries is a combination of the results for each individual component of spending cuts and tax increases. In figure 11, ROECD GDP falls in 1993 but is above baseline by 1994. The global fall in real interest rates stimulates non-U.S. private investnent as well as non-U.S. share markets. The rise in share markets outside the U.S. is reflecting the higher expected level of future output as well as the fall in real interest rates in these economies.

The results for non-oil developing countries are shown in figure 12. The Clinton budget raise LDC exports in terms of U.S. goods and allows an increase in imports of developing countries through relaxing the balance of payments constraint through lower real interest rates. These results follow directly from the discussion of the individual components discussed above. _e)_ **_The_** _Fiscal_ **_Impicaions_** _of_ **_the_** _Maasticht Agreement_ In addition to showing the results for the Clinton budget, figures 9 through 12 contain results for the Maastricht agreement. When interpreting these results, some care should be exercised. The results assume that in 1993 there is a new understanding that fiscal consolidation in Europe will occur from 1993 through 1997. In fact, the Maastricht Agreement has been a significant issue since 1991. Some of the results, especially those for asset markets will not line up with the actual experience from 1993 .because presumably some of the asset price story will have already occurred before the starting 4 See McKibbin and Bagnoli (1993) for detailed analysis of the impacts of the bhdget that was originally presented to Congress in ealy 1993.

s In McKibbin and Bagnoli (1993) as in Clark and Symansky (1993), the Clinton budget that was proposed in February actually raised GDP in the early years because of a greater initial rise in spending as well as the introducton of an investment tax credit that are absent form the package of measures that passed Congress.

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