Executive SummaryWe examine the evidence on episodes of large stances in fiscal policy, in cases of both fiscal stimuli and fiscal adjustments in OECD countries from 1970 to 2007. Fiscal stimuli based on tax cuts are more likely to increase growth than those based on spending increases. As for fiscal adjustments, those based on spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based on tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions. We confirm these results with simple regression analysis.

This paper evaluates the effects of fiscal policy on investment using a panel of OECD countries. We find a sizeable negative effect of public spending—and in particular of its wage component—on profits and on business investment. This result is consistent with different theoretical models in which government employment creates wage pressure for the private sector. Various types of taxes also have negative effects on profits, but, interestingly, the effects of government spending on investment are larger than those of taxes. Our results can explain the so-called "non-Keynesian" (i.e., expansionary) effects of fiscal adjustments. (JEL E22, E62)

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