The Impact of Fiscal Consolidation on Human Development

Abstract

We find that fiscal austerity is associated with a reduction of human development standards, with the negative effect being particularly severe in the case of spending-driven consolidation episodes. Fiscal adjustments are especially damaging for human development in developing countries (namely, African and Latin American countries). Additionally, the empirical evidence shows that (i) government stability is a crucial institutional determinant of human development, and (ii) while investment in physical capital can boost human development, government consumption and inflation are detrimental to it.