The Role of Fiscal Policy in Spain from 2007 to 2010 and the Influence of Aggregate Public Spending on Economic Growth

Abstract

In the early stages of the crisis that is currently affecting the Spanish economy, the fiscal policy that excessively re-sorted to automatic stabilizers helped overwhelm the deficit and public debt. In this context, first, in this paper we ana-lyse 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 im-plemented 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 exis-tence 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.