On the Effects of Fiscal Policies in Portugal

Abstract

This paper estimates the long-term effects on output of different fiscal policies in Portugal in the context of unrestricted VAR models that include several public spending and taxation variables. Empirical results suggest that the effects of fiscal policies are within the Keynesian paradigm for public transfers, public consumption, public investment and direct taxation, with public investment showing particularly strong positive effects and direct taxation showing particularly strong negative effects. In turn, non-Keynesian effects dominate in the case of public wages where cuts are expansionary and indirect taxation where raises are neutral. Accordingly, cuts in public wages and raises in indirect taxations are the two most desirable instruments for fiscal consolidation in Portugal. Finally, deficit-neutral policies that offset raises in public transfers, public consumption, and public investment, with raises in indirect taxes have long-term positive effects on output. The same is true for cuts in direct taxation offset with cuts in all forms of public spending except for public investment.policy, budgetary restraint, fiscal consolidation