Stabilisation policies in a small Euro area economy: taxes or expenditures A case study for Slovenia

Abstract

In this paper, we investigate how effective stabilisation policies can be in Slovenia. In particular, we analyse whether policy or expenditure policy has stronger multiplier effects. Slovenia is an interesting case because it is a small open economy in Central Europe that was already in the Euro area before the Great Recession. Using the SLOPOL10 model, an econometric model of the Slovenian economy, we show that those public spending measures that entail both demand and supply side effects are more effective at stimulating real GDP than pure demand side measures. Measures that improve the education level of the labour force are very effective at stimulating potential GDP. Employment can be most effectively stimulated by reducing the tax wedge on labour income, thereby positively affecting Slovenia's international competitiveness. However, simulations show that fiscal policy measures can only mitigate but not undo the adverse effects of a crisis like the Great Recession.