By C. Mulas-Granados
Inspired through the proliferation of economic consolidation episodes within the introduction of economic Union, this publication explains the reasons and results of economic coverage in Europe, utilizing thought and empirical proof from the final 4 many years.
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Extra resources for Economics, Politics and Budgets: The Political Economy of Fiscal Consolidations in Europe
2 The management of public expenditures and public revenues to influence aggregate demand and then the total economy, in the way described in the previous paragraph, constitutes what is known as fiscal policy. If the government decides to cut taxes and/or to increase expenditures, we say that this government is undertaking a fiscal expansion. If it increases taxes and/or reduces public expenditures, we say that it is undertaking a fiscal adjustment. Fiscal policy in general, and the motivations and characteristics behind fiscal adjustments, in particular, are the subject of this book.
First of all, if the government considers that it will be re-elected when the economy is growing and the unemployment rate is low, then it may be willing to initiate a fiscal expansion just before the election in order to increase the probability of being re-elected. 23 But if this behaviour is never punished by the electorate, it will also generate progressively accumulating debt associated with each fiscal expansion previous to every election. This type of electoral Economics, Politics and Fiscal Policy 37 influence on fiscal policy only holds under two assumptions: (1) there exists fiscal illusion among voters, according to which they overestimate the benefits of current expenditures and underestimate the future tax burden that will be needed to finance current expenditure;24 and/or (2) voters are totally misinformed, and this is why it is difficult for them to fully understand the details of public budget’s composition and its long-term impact.
On the contrary, it is also based on the convincing empirical evidence found by prominent political economists which supported the thesis that politics and ideology matter for economic policy-making and economic policy outcomes. The first literature on the subject provided empirical evidence that supported the thesis that left-wing governments fought unemployment while right-wing governments were especially worried about inflation (Hibbs, 1977, 1987). This clearly meant that the former used Keynesian policies of demand management to achieve full employment, while the latter maintained small and balanced budgets to let the market achieve its full employment equilibrium, regardless of the consequences for equality.
Economics, Politics and Budgets: The Political Economy of Fiscal Consolidations in Europe by C. Mulas-Granados