Fiscal Policy of Spain Essay

7398 Words Jan 24th, 2011 30 Pages
FELIPE SERRANO

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
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The constant appeal to the effects of population aging on public expenditure in the following decades is presented as a burden to the implementation of fiscal stimulus in the present situation. All things considered, in the reports of the International Monetary Fund (IMF), Organization for Economic Cooperation and Development
1 In these models, individuals do not participate in financial markets. Their consumption is supposed to be equal to their disposable income; therefore, they do not lend or borrow resources. 2 “The fiscal response to the crisis was to increase government spending, lower taxes, and accept much larger fiscal deficits. Given the collapse of private demand, and the inability to reduce interest rates below zero, governments clearly chose the right response. But large deficits lead to rapid increases in debt, and, because debt levels were already high in many countries, such increases cannot go on for long. As large deficits continue, debt sustainability comes increasingly into question. And with this comes the risk of higher long-term interest rates, both because of anticipated crowding out of private borrowers by government borrowers and because of a higher risk of default” (Blanchard, 2009, p. 10).

ThE SPANISh FISCAL POLICY DURING ThE RECENT “GREAT RECESSION”

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(OECD), and the European Commission, there is a predominant conviction that the best guarantee for the economic growth is associated with narrow

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