Alternative Strategies to Reduce Public Deficits: Taxes vs. Spending

Abstract

We examine the effects of several alternative measures intended to reduce government deficits for the case of Spain, distinguishing between those acting through taxes and through spending. The Spanish case is relevant as an example of front-loaded fiscal adjustment that has led to a large GDP fall, where (unlike the cases of Greece, Ireland and Portugal) the authorities were able to choose the composition of the adjustment measures. The empirical methodology is based on a computable general equilibrium model. All the simulated policies lead to a decrease in the levels of output and employment, and to a higher unemployment rate. The greatest contractionary effects appear in the case of an increase in the income tax, followed by spending cuts, especially in public education; in contrast, the contractionary effect is weaker for indirect tax increases. While income distribution for labour worsens with spending cuts, it slightly improves with tax increases.

Impact of macro-fiscal determinants on health financing: empirical evidence from low-and middle-income countries

“…They found that tax revenues are strongly positively associated with greater investment in public health, access to healthcare services and better health outcomes. Cross country studies have argued that alternative tax regimes such as income tax, taxes on goods & services have a different impact on the allocation of PHE and suggests that unproductive expenditure cuts and increase tax base are the alternative strategies to raise finance for the health sector [43, 44]. Sub-national level studies have argued that per capita tax revenue shows a positive and significant relationship with the growth of PHE in the medium to long-run [30, 45].…”

Political Factors of the Cuts and Surges in Government Spending: The Effects on Old Market Democracies and Post-Communist Countries

“…The French experience shows that the undertaking of obligations under extremely expensive social programsboth by conservatives and by socialistshas hardly shaken the stance of radicals: extremists who are now openly demanding confiscatory taxes, holding clownish campaigns and bringing about serious consequences for national policies. 4 In other words, accommodating competitors' demands, as preposterous as that can be, would allow one to prevent further radicalizationalthough this does not always work as a minimum.…”

“…http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=URISERV:l25021&from=EN4 For example, Jean-Luc Mélenchon (Left Front (Front de gauche)) demanded a 100% tax on high earnings to support air-castle costly projects: Mélenchon's growing number of supporters view it as common sense and salutary: a 100% tax on earnings over £300,000; full pensions for everyone from the age of 60; reduction of work hours; a 20% minimum wage increase; however, the above deliberately unserious demands look quite reasonable from the point of view of The Guardianthe voice of almost mainstream left-wing parties in the UK: http://www.theguardian.com/commentisfree/2012/apr/15/jean-luc-melenchon-france-presidential-candidate.…”

How does fiscal austerity impact on poverty and inequality? The Spanish case

“…In fact, in 2014 employment and output grew in annual terms for the first time since the onset of the crisis (Spanish Government, 2014). The measures to carry out this fiscal consolidation were established by the Spanish government including expenditure and revenue measures, unlike other countries in the European periphery with marked public deficits and mostly expenditure-based fiscal consolidation as imposed by IMF or EU (Bajo-Rubio & Gómez-Plana, 2015). Thus, in addition to a reduction in public expenditure, on the revenue side, the economic recovery led to an improvement in the components of the revenue structure, including private consumption, which boosted VAT revenues among others.…”