The Spanish fiscal policy during the recent “great recession” Abstract: This paper examines the fiscal strategy followed by the Spanish government in order to stop the fall of aggregate demand induced by the financial crisis. The Spanish economy provides the best example among the countries of the European Monetary Union of the contradictions between the discretionary fiscal policy in the crisis and the fiscal rules. The intensity of the crisis and some initial badly designed fiscal stimulus shortened the fiscal space, raising the deficit over the limit established in the Stability and Growth Pact. As a consequence of the enforcement of the rule, the Spanish administration has to apply a restrictive fiscal policy without having left the recession, while keeping one of the lowest indebtedness levels in the euro zone countries. Key words: fiscal policy, fiscal rules, Spain.
In a recent article, Auerbach indicated that “the current recession provides compelling circumstances for renewed fiscal policy activism. But the strong support for fiscal policy intervention reflects a renewed belief in policy activism that had already appeared before the present crisis” (2009, p. 548). It is true that during the last years, we have observed the theoretical rediscovery of the advantages of the fiscal policy to control aggregate demand. This new interest, though, is not generalized and has not been able to provide enough “inputs” for the design of new fiscal strategies. The claims for an active fiscal policy have always been one of the distinct features of Post Keynesian thought, which has considered fiscal policy as a more powerful instrument than monetary policy (Arestis and Sawyer, 2003). However, as Arestis and Fontana point out, “it is really
Felipe Serrano is a professor of economics in the Department of Applied Economics V at the University of the Basque Country, Spain. This paper was presented at the International Conference Developments in Economic Theory and Policy held in Bilbao, July 2–3, 2009. The author thanks the three anonymous referees for their comments and suggestions. The usual disclaimer applies. Journal of Post Keynesian Economics / Spring 2010, Vol. 32, No. 3 371 © 2010 M.E. Sharpe, Inc. 0160–3477 / 2010 $9.50 + 0.00. DOI 10.2753/PKE0160-3477320303
JOURNAL OF POST KEYNESIAN ECONOMICS
astonishing that the journals that typically publish contributions within the Post Keynesian tradition have few or no papers dealing with the stabilization role of discretionary fiscal policy” (2009, p. 547). The recent theoretical recovery of fiscal policy is also associated, paradoxically, with the “new macroeconomics consensus.” Its new models of equilibrium rediscover fiscal policy (for “normal times”) when combining the rigidity on prices and wages with the presence of non-Ricardian consumers (Galí et al., 2007).1 These new models, however, are still being developed, and they are not a distinctive feature of the new macroeconomics consensus. The present use of the fiscal policy is pragmatic. The core idea is that not all countries can apply expansionary fiscal policy and not all countries can apply it with the same intensity (Spilimbergo et al., 2008). The fiscal possibilities depend on the fiscal space that is available. This space ends when the maintenance of deficits faces a problem of sustainability.2 The concept of sustainability is ambiguous in its definition. There does not exist an unambiguous definition of sustainability and of the limits that should define the corresponding implicit fiscal rule—that is, a limit to the total deficit, to the primary deficit, or to public debt. Fiscal policy has been used because the crisis has weakened the traditional monetary transmission mechanisms. But, simultaneously, fiscal rules, at least in the European Monetary Union (EMU), are maintained, although a degree of flexibility in their interpretation is accepted. The concern about keeping down the...
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