Abstract
In the early stages of the crisis that is currently affecting the Spanish economy, the fiscal policy that excessively resorted to automatic stabilizers helped overwhelm the deficit and public debt. In this context, first, in this paper we analyse the trend and variation rate of government revenue as well as expenditure on final consumption and government investment in the last 15 years in relation to the business cycle. In another vein, we also explore and quantify the impact of the countercyclical policies provided from 2007 to 2010 and their impact on the tax burden, which enables us to evaluate the stabilizing role of fiscal policy and thus highlight its fragility. Second, given the challenges of budgetary stability facing the Spanish economy, and always based on the above analysis in which we display the limited room for fiscal manoeuvre, we present the effects of aggregate public spending in a systematic and quantified way as well as its composition as an instrument of fiscal policy. In this framework, a long term stable equilibrium relationship is studied, based on two bivariate models that cointegrate econometrically, that is to say, to estimate models for error correction for cointegrated nonstationary series (and ultimately able to anticipate the evolution of the Spanish economy), we estimate and assess the contribution of spending on investment and government final consumption on aggregate output as well as its differential effect, to assess the concrete impact of the measures applied and ultimately the role of fiscal policy implemented in the early years of the crisis and those that will be designed in the future. Finally, the main conclusion given by the model of behaviour for the final consumption expenditure of general government and GDP, is the existence of delayed adverse effects on the rate of growth of public spending on growth rate GDP. Taking into account the response function of GDP for a boost in public consumption, we estimate that with a lag of two years, an increase in the growth rate of public consumption is falling in the rates of change of aggregate output. Moreover, we can also deduce that the delayed effects of the rate of decline in public investment have a negative impact on economic growth.
Highlights
Going through the Worst Crisis in DecadesDuring the year 2008, we were exceptional spectators of the international economic deterioration and the first global crisis of the 21st century that apparently originated in the explosion of subprime mortgages in the United States in 2007
Given the challenges of budgetary stability facing the Spanish economy, and always based on the above analysis in which we display the limited room for fiscal manoeuvre, we present the effects of aggregate public spending in a systematic and quantified way as well as its composition as an instrument of fiscal policy
A long term stable equilibrium relationship is studied, based on two bivariate models that cointegrate econometrically, that is to say, to estimate models for error correction for cointegrated nonstationary series, we estimate and assess the contribution of spending on investment and government final consumption on aggregate output as well as its differential effect, to assess the concrete impact of the measures applied and the role of fiscal policy implemented in the early years of the crisis and those that will be designed in the future
Summary
During the year 2008, we were exceptional spectators of the international economic deterioration and the first global crisis of the 21st century that apparently originated in the explosion of subprime mortgages in the United States in 2007. Eurozone governments initially responded to the negative outlook of the recession with various countercyclical fiscal measures, under the European Economic Recovery Plan1 In this context, it can be said that the effects on public finances were negative across the board as a result of the sharp fall in government revenues and increased spending, especially those designed to mitigate the effects of the crisis and to nourish the aid for the banking system and other sectors of the economy. The first two were violated as it was necessary to have mechanisms that would help countries with serious debt problems, and only the third became a reality but not until 2012 In this regard, there have been various factors that have negatively affected the economic outlook, mainly, the lack of European policies for recovery, the volatility of international financial markets and the slow adoption of agreements. The significant declines in the collection of the most considerable taxes for the economic cycle-up to 63% in corporate tax (CT) and 13% in the value added tax (VAT), in spite of a rate increase in the 2010 general budget—along with discretionary expansion measures beyond automatic stabilizers, led to the change in just two years (2008-2009) of 20,066 million euros in surplus in 2007 to −117,630 million euros in deficit, though fiscal consolidation measures adopted in 2010 reduced the deficit to −98,227 million euros
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