Sustainable Future Fiscal and Debt
Policies: Lessons from Spain
Jesús Ferreiro, Carmen Gómez and Felipe Serrano
Department of Applied EconomicsV
University of the Basque Country UPV/EHU
Conference “Fiscal and debt policies for the future”
The Cambridge Trust for New Thinking in Economics
St Catharine’s College, University of Cambridge, 11 April 2013
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1. Mainstream View of Fiscal Policy: Fiscal
Policy does not Matter
 Low impact of active fiscal policy: fiscal multipliers below 1(even
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below 0, mainly in the medium and long-term)
Low smoothing-effect of shocks: low size of automatic stabilizers
The size of the public sector (spending/GDP and
revenues/GDP ratios) generates a negative impact on economic
activity and growth
Fiscal consolidations are expansionary
Not only the size, but also the composition of public finance
matters:
 The (negative) impact of direct taxes is higher than that of
indirect taxes
 Improductive expenditures must be reduced (size and share)
2. Lessons from the crisis: Fiscal Policy does
Matter
 Fiscal multiplier is (well) above 1. Fiscal multipliers of expenditure are
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higher than tax multipliers (Anderson et al 2013; Arestis and Sawyer
2012; Auerbach &Gorodnichenko 2012; Batini, Callegari & Melina
2012; Christiano, Eichembaum and Rebelo 2011; IMF 2012)
Fiscal multipliers are higher during (big) recessions (Auerbach &
Gorodnichenko 2012; Batini, Callegari & Melina 2012; Romer &
Berstein 2009; Baum, Poplawski-Ribeiro & Weber 2012)
Fiscal multipliers are higher with an accomodative monetary policy
(low-zero interest rates) (Anderson et al 2013; Christiano,
Eichembaum and Rebelo 2009; Freedman et al 2009)
The impact of fiscal policy depends on the coordination between fiscal
and monetary policies: restrictive monetary policy makes fiscal
multipliers below 1, and close to or below zero
Automatic stabilizers generate a high output smoothing leading to
lower expansionary discretionary fiscal policies
 The size of public sector works as an automatic stabilizers (Andres,
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Domenech & Fatas 2008; Debrun, Pisani-Ferry & Sapir 2008; Fatas &
Mihov 2001; Lee & Sung 2007)
Fiscal consolidations are not (always) expansionary (Batini, Callegari &
Melina 2012; Bi, Leeper,& Leith 2012; Dullien 2012; IMF 2010;
Jayadev & Konczal 2010; Perotti 2011)
(Frontloaded) Fiscal consolidations during recessions are
contractionary (Batini, Callegari & Melina 2012; Blanchard & Leigh
2013; Rawdanowicz 2012)
Fiscal tightening do not reduce in the short-term the debt-to-GDP
ratio (Eyraud & Weber 2013)
The higher elasticity of direct taxes makes fiscal deficits higher in
countries with higher share of direct taxation
Fiscal multipliers are higher in the presence of not-rational agents with
liquidity and financial constraints (in’tVeld, Larch and Vandeweyer
2012)
3. Lessons for a better fiscal policy in Spain (and other
countries) (or what we can learn from someone else’ mistakes)
Lesson 1: The size of public expenditures in Spain
must be increased
The size of the public sector has worked as an effective automatic stabilizer
helping to (partially) offset the impact of the crisis.
The size of the public sector in Spain was below the European average.
Spain, like other countries with a small size of the public expenditures,
has seen how the impact of the economic crisis in terms of output, has
been higher than in countries with higher public expenditures.
The smaller impact of the crisis (and the consequent lower need of a
countercyclical fiscal measures) has led to a smaller deterioration of
public finances in countries with the highest sizes of public sector.
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Spain
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Lesson 2: Public revenues must be increased
Tax burden is lower in Spain than in the rest of EMU economies (7.7
p.p. GDP in 2012), only higher than in Ireland and Slovakia
It creates a problem of a lack of resources to fund a higher level of
expenditures (both “productive” and “unproductive”)
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Moreover, public revenues in Spain are highly sensitive to changes in
economic activity, much higher than in the other euro countries,
mainly in the case of the personal income tax.
This means that during downturns, fiscal deficits increase in Spain
much more than in other economies due to the higher fall in
public revenues
Besides increasing taxes, the current structure of personal income
tax must be reformed in order to make it less sensitive to
economic fluctuations
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Lesson 3: Fiscal policy must be countercyclical, during
recessions but also during expansions
A procyclical fiscal policy during expansions overheats the
economy (increasing internal and external disequilibria) and
reduces the fiscal space to implement expansionary fiscal
policies when needed (recessions)
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Lesson 4: During expansions fiscal policy must be
tight enough to correct macroeconomic imbalances
It is not enough that fiscal policy be countercyclical. It is also (and
even more) important the intensity of the countercyclical fiscal
policies
Despite that fiscal policy in Spain during the 2000s adopted a
contractionary stance, the size of the fiscal tightness was not
enough to correct the main macroeconomic imbalances of the
Spanish economy (mainly inflation and external imbalances), what
led to the adoption of tighter fiscal policies during the recession
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Lesson 5: Fiscal policy must not only take into account
macroeconomic imbalances but also financial
imbalances
Fiscal policy must not only focus on traditional macroeconomic
imbalances (actual-potential GDP ,GDP growth, (un)employment,
inflation, current account balance…). It must also consider the
situation of financial markets (financial stability), trying to avoid an
excessive size of the private agents indebtedness and of the
financial-banking sector
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Lesson 6: Fiscal and monetary policies must be
properly coordinated
Fiscal and monetary policies must be coordinated.
Empirical studies show that fiscal multipliers are low (below 0 or
negative) when monetary policy reacts by rising interest rates. On
the contrary, these multipliers are much higher (above 1) in the
presence of an accomodative monetary policy or when interest
rates are close to zero
Expansionary fiscal policies are ineffective if, simultaneously,
monetary policies adopt a contractionary stance.
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Lesson 7: An expansionary (countercyclical) fiscal
policy must be based on higher expenditures
Multipliers of public expenditure are higher than those of public
revenues
An expansionary fiscal policy should be based on rising expenditures
not on cutting taxes
The economic impact of a expansionary fiscal policy based on tax
cuts is small, mainly in an environment of rising interest rates
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Lesson 8: A sustainable fiscal policy cannot be based on
a rule limiting the cyclically adjusted fiscal balance.
Special attention must be paid to the evolution of
public debt
Problems with the estimation of cyclically adjusted fiscal balances:
 The estimation of potential output and the output gap
 The estimation of fiscal (revenues and spending elasticities)
 The estimation of fiscal multipliers
Current sovereign debt crises in the euro area shows that risk premia (a
measure of the confidence of the public about the sustainability of public
accounts) is not so much related to the size of public deficits or even to the
size of the public debt but to the evolution of the gross debt
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Artículo 135 C.E.
1. Todas las Administraciones Públicas adecuarán sus actuaciones al principio de estabilidad presupuestaria.
2. El Estado y las Comunidades Autónomas no podrán incurrir en un déficit estructural que supere los márgenes establecidos,
en su caso, por la Unión Europea para sus Estados Miembros.
Una ley orgánica fijará el déficit estructural máximo permitido al Estado y a las Comunidades Autónomas, en relación con
su producto interior bruto. Las Entidades Locales deberán presentar equilibrio presupuestario.
3. El Estado y las Comunidades Autónomas habrán de estar autorizados por ley para emitir deuda pública o contraer crédito.
Los créditos para satisfacer los intereses y el capital de la deuda pública de las Administraciones se entenderán siempre
incluidos en el estado de gastos de sus presupuestos y su pago gozará de prioridad absoluta. Estos créditos no podrán ser
objeto de enmienda o modificación, mientras se ajusten a las condiciones de la ley de emisión.
El volumen de deuda pública del conjunto de las Administraciones Públicas en relación con el producto interior bruto del
Estado no podrá superar el valor de referencia establecido en el Tratado de Funcionamiento de la Unión Europea.
4. Los límites de déficit estructural y de volumen de deuda pública sólo podrán superarse en caso de catástrofes naturales,
recesión económica o situaciones de emergencia extraordinaria que escapen al control del Estado y perjudiquen
considerablemente la situación financiera o la sostenibilidad económica o social del Estado, apreciadas por la mayoría
absoluta de los miembros del Congreso de los Diputados.
5. Una ley orgánica desarrollará los principios a que se refiere este artículo, así como la participación, en los procedimientos
respectivos, de los órganos de coordinación institucional entre las Administraciones Públicas en materia de política fiscal y
financiera. En todo caso, regulará:
a) La distribución de los límites de déficit y de deuda entre las distintas Administraciones Públicas, los supuestos
excepcionales de superación de los mismos y la forma y plazo de corrección de las desviaciones que sobre uno y otro
pudieran producirse.
b) La metodología y el procedimiento para el cálculo del déficit estructural.
c) La responsabilidad de cada Administración Pública en caso de incumplimiento de los objetivos de estabilidad
presupuestaria.
6. Las Comunidades Autónomas, de acuerdo con sus respectivos Estatutos y dentro de los límites a que se refiere este artículo,
31 adoptarán las disposiciones que procedan para la aplicación efectiva del principio de estabilidad en sus normas y decisiones
presupuestarias.
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Lesson 9: Public revenues cannot depend on bubbles
Bank of Spain estimated that the burst of the housing bubble
generated a fall of revenues amounting, at least, 2 percent of the
GDP
This fall of revenues affected regional and, mainly, local governments
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Lesson 10: Public pension system must be reformed to
make it sustainable
Social security (public pensions system) helped to improve public finance
during the expansion boom, due to the increase in employment
Nowadays, social security suffers a double problem:
 Conjunctural: the falling employment and wages leads to fall in the
collection of social security contributions collection, generating a deficit
 Structural: the deep ageing process will generate in the medium-term a
high deficit
Measures must be adopted to make the system sustainable, avoiding the
generation of permanent deficits in the pension system
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Lesson 11: Better coordination mechanisms (Rules?)
regarding the public finances of sub-national
governments must be set up
A significant part of the increase in the fiscal deficit and the public
debts has been generated by the sub-national administrations (mainly
regional governments)
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Future sustainable fiscal policies in Spain involve to take measures
regarding the public finances of regional governments:
 Reforming the funding system of regional governments:
excessively dependent on the forecast of tax collection made by
the central government
 Correcting the structural trend to generate fiscal deficits:
 Spending prodigality of regional governments
 Public revenues are very sensitive to economic fluctuations (high
positive elasticity) but public spending of regional governments
(social protection) are not sensitive to these fluctuations or, if they
are, the elasticity is negative. In sum, during downturns regional
governments tend to generate high deficits
 The correction of fiscal imbalances of regional governments is
difficult to achieve:
 Small capacity to rise taxes
 Problems to cut spending
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4. Summary
Lesson 1: The size of public expenditures in Spain must be increased
Lesson 2: Public revenues must be increased
Lesson 3: Fiscal policy must be countercyclical, during recessions but
also during expansions
Lesson 4: During expansions fiscal policy must be enough tight to
correct macroeconomic imbalances
Lesson 5: Fiscal policy must not only take into account
macroeconomic imbalances but also financial imbalances
Lesson 6: Fiscal and monetary policies must be properly coordinated
Lesson 7: An expansionary (countercyclical) fiscal policy must be
based on higher expenditures
Lesson 8: A sustainable fiscal policy cannot be based on a rule limiting
the cyclically adjusted fiscal balance. Special attention must be paid
to the evolution of public debt
Lesson 9: Public revenues cannot depend on bubbles
Lesson 10: Public pension system must be reformed to make it
sustainable
Lesson 11: Better coordination mechanisms (Rules?) regarding the
39 public finances of sub-national governments must be set up