Is the end of fiscal austerity feasible in Spain? An alternative plan to the current Stability Programme (2015–2018)

Abstract

The Spanish authorities have implemented strongly restrictive fiscal policies with a negative impact on GDP and employment, especially during the recession of 2011–2013. This paper shows that the end of fiscal austerity is feasible for Spain. Adopting a ‘functional finance’ approach to fiscal policy and making a (partial) use of the idea of Balanced Budget Expansion, we present an alternative fiscal policy for the years 2016–2018 which is not focused on deficit reduction, but on employment creation and on the development of social and structural policies aimed at a real transformation of the Spanish economy. The two main components of this plan are a progressive fiscal reform to increase public revenue over GDP, and a simultaneous increase in the ratio of public expenditure over GDP. With the aid of a three-equation model, this paper proves that an alternative plan to austerity can be not only expansionary but also fully compatible with fiscal sustainability. The choice, then, lies between prioritising either the rate at which unemployment is reduced or at which public deficit is reduced.