Title: Fiscal space on the eurozone periphery: The case of Spain
Abstract: On the one hand, every official document about policy in Spain, and most orthodox academic papers argue that Spain has no fiscal space and that it should apply resolute actions to assure budget consolidation. On the other hand, Spain also had the second highest unemployment rate in the Eurozone in 2015: 21% of the active population. A rapid decline in that rate would require a higher impulse to sustain higher economic growth rates. This IMK working paper addresses this dilemma, presenting two alternative scenarios for the next years analyzing their impact on unemployment and sustainability. The first scenario represents a firm commitment to budget consolidation, while in the second the government uses the instrument to stimulate domestic demand and ensures a GDP growth rate target. The second scenario is based on an application of an imperfect balanced budget multiplier, proposing a combination of discretionary increases in both public expenditure and revenue. The main conclusion is that the end of austerity is feasible and perfectly compatible with finances sustainability for Spain. In addition some more general topics are discussed: the difference between the functional finance and the sound finance approaches to policy; the possibility of a Balanced Budget expansion; a discussion of the concept of fiscal space; and the inadequacy of European rules.
Publication Year: 2017
Publication Date: 2017-01-01
Language: en
Type: preprint
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