Friday, October 5, 2012: 2:20 PM
High government deficits are a matter of concern in many countries. In fact, in most European countries fiscal consolidation policies are being implemented to reduce the size of government deficits, in order to recover the confidence of financial markets and avoid the risk of sovereign default. However, such policies are also expected to lead to output falls, which will hinder the reduction of deficits. In this paper, we will examine the effects of several alternative measures intended to reduce public deficits, distinguishing between those acting through either taxes or spending. Our analysis will be applied to the Spanish economy, who has committed to a reduction in the government deficit to 5.3% of GDP in 2012; at the same time that GDP is expected to fall by 1.8%, according to the last IMF forecasts. The empirical methodology will make use of a computable general equilibrium model, which allows one to gather the consequences of changes in a particular variable on the whole economy under analysis, as well as to obtain the specific effects across the different productive sectors.