How does fiscal austerity impact on poverty and inequality? The Spanish case

The aim of this paper is contributing to fill the gap between the macroeconomic effects of policy reforms and the microeconomic and social ones, considering simultaneously both kind of impacts. Regarding fiscal adjustments, concern about the sustainability of public deficit and debt resulting from the Great Recession led governments to adopt austerity measures in most European countries. Our analysis considers the redistributive effects of such adjustments for the Spanish economy by simulating a hypothetical reduction of public deficit and distinguishing between spending cuts and tax hikes. In terms of analytical approach, a Computable General Equilibrium (CGE) model and a microsimulation model are integrated to include the general equilibrium effects of these measures as well as the effects on income distribution. The results contribute to the growing but limited literature on the distributional effects of fiscal consolidations by showing that policymakers have to choose between more inequality or more poverty.

Output Effects of Fiscal Consolidations: Does Spending Composition Matter?

This paper studies whether changes in the composition of public spending affect the macroeconomic consequences of fiscal consolidations. Based on a sample of 44 developing countries and 26 advanced economies during 1980-2019, results show that while fiscal consolidations tend to be on average, contractionary, the size of the output fall depends on the behavior of public investment vis-a-vis public consumption during the fiscal adjustment, with heterogeneous responses growing over time. When public investment is penalized relative to public consumption and thus, its share in public expenditures decreases, a 1 percent of GDP consolidation reduces output by 0.7 percent within three years of the fiscal shock. In contrast, safeguarding public investment from budget cuts vis-a-vis public consumption can neutralize the contractionary effects of fiscal adjustments on impact, and can even spur output growth over the medium term. The component of GDP that mostly drives the heterogeneity between both types of adjustments is private investment. The results hold up to a number of robust-ness tests, including alternative identification strategies of fiscal shocks. The findings have policy implications for the design of fiscal adjustment strategies to protect economic growth as countries recover from the coronavirus pandemic.consolidation reduces output by 0.7 percent within three years of the fiscal shock. In contrast, safeguarding public investment from budget cuts vis-a-vis public consumption can neutralize the contractionary effects of fiscal adjustments on impact, and can even spur output growth over the medium term. The component of GDP that mostly drives the heterogeneity between both types of adjustments is private investment. The results hold up to a number of robustness tests, including alternative identification strategies of fiscal shocks. The findings have policy implications for the design of fiscal adjustment strategies to protect economic growth as countries recover from the coronavirus pandemic.

Brazilian Dependent Capitalism Under the Hegemony of Financialized Capital

An analysis of the Brazilian economic history of the past 50 years shows that the accumulation of foreign debt and its subsequent crisis in the 1980s, the ensuing fiscal adjustments with supervision by the International Monetary Fund, the execution of the Real Plan in 1994, the resulting macroeconomic trifecta, and new laws and resolutions have reinforced and expanded Brazil’s economic and financial dependency. Since the 1990s, its political-economic relations have been shaped by the principles of a liberal-monetarist economy that is the basis for the accumulation and revaluation of domestic and foreign capital. Uma análise da história econômica brasileira dos últimos 50 anos mostra que o acúmulo da dívida externa e sua posterior crise nos anos 1980, os subsequentes ajustes fiscais com supervisões do International Monetary Fund, a execução do Plano Real em 1994, a decorrente política do tripé macroeconômico e as leis e resoluções, reforçaram e ampliaram a dependência econômico-financeira do Brasil em sua inserção mundial. Desde os anos 1990, o âmago das relações político-econômicas brasileiras está gestado por princípios doutrinários de uma economia liberal-monetarista, a qual é a base para a acumulação e revalorização de capital interno e externo.

Fiscal adjustments, income inequality and economic growth: an empirical analysis of Japanese prefectures

PurposeThis paper investigates the joint relationship between economic growth, income inequality and fiscal adjustments using a panel of 47 Japanese prefectures from 1998 to 2017.Design/methodology/approachTo assess jointly fiscal adjustment impacts on growth and inequality and to take into account the interdependence between these variables, the authors use a simultaneous equation model and estimate it by using the three-stage least squares estimation method.FindingsThe results show evidence of a trade-off between growth and inequality through fiscal adjustments. They reveal that first, fiscal adjustments have contractionary effects on growth. Second, they highlight the disparity between urban and rural taxpayers. Third, they provide evidence of a trade-off between fiscal adjustments and inequality through the labor market.Research limitations/implicationsBased on the literature, the composition of fiscal adjustments is a crucial factor in analyzing fiscal adjustment impacts on economic growth and income inequality. The authors do not consider this aspect in the analysis; however, fiscal policy outcomes variables are included as a workaround for this.Practical implicationsThese results suggest that authorities favor expenditure-based adjustments as they are less contractionary on the economy. Moreover, they should finance public expenditures through a tax on capital in order to mitigate fiscal adjustment impacts on inequality while promoting growth.Originality/valueThe paper is novel in testing the existence of a trade-off between economic growth and income inequality through fiscal adjustments at a sub-national level with an additional focus on urban and rural regions.

Budget Deficits and Fiscal Adjustments under Fragmented Decision Making: New Evidence on an Old Discussion

The purpose of this paper is to present the existing literature of political explanations for budget deficits and fiscal adjustments. The literature is distinguished initially in two broad categories, namely the effects of conflicts among agents with heterogeneous preferences and institutional effects. At the next stage the category of conflicts among agents is further distinguished in two approaches, namely political stability approach and weak government approach. The existing literature confirms that political instability leads to the strategic use of debt and therefore to higher fiscal deficits. Institutions are proved to contribute positively to the success of fiscal adjustments. However, interest groups with political power and the risk aversion character of politicians imply that fiscal adjustment is usually delayed and more costly.

Redistribution and the Monetary-Fiscal Policy Mix

We show that the effectiveness of redistribution policy in stimulating the economy and improving welfare is directly tied to how much inflation it generates, which in turn hinges on monetary-fiscal adjustments that ultimately finance the transfers. We compare two distinct types of monetary-fiscal adjustments: In the monetary regime, the government eventually raises taxes to finance transfers, while in the fiscal regime, inflation rises, effectively imposing inflation taxes on public debt holders. We show analytically in a simple model how the fiscal regime generates larger and more persistent inflation than the monetary regime. In a quantitative application, we use a two-sector, two-agent New Keynesian model, situate the model economy in a COVID-19 recession, and quantify the effects of the transfer components of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. We find that the transfer multipliers are significantly larger under the fiscal regime—which results in a milder contraction—than under the monetary regime, primarily because inflationary pressures of this regime counteract the deflationary forces during the recession. Moreover, redistribution produces a Pareto improvement under the fiscal regime.