How does fiscal austerity impact on poverty and inequality? The Spanish case

Abstract

The aim of this paper is contributing to fill the gap between the macroeconomic effects of policy reforms and the microeconomic and social ones, considering simultaneously both kind of impacts. Regarding fiscal adjustments, concern about the sustainability of public deficit and debt resulting from the Great Recession led governments to adopt austerity measures in most European countries. Our analysis considers the redistributive effects of such adjustments for the Spanish economy by simulating a hypothetical reduction of public deficit and distinguishing between spending cuts and tax hikes. In terms of analytical approach, a Computable General Equilibrium (CGE) model and a microsimulation model are integrated to include the general equilibrium effects of these measures as well as the effects on income distribution. The results contribute to the growing but limited literature on the distributional effects of fiscal consolidations by showing that policymakers have to choose between more inequality or more poverty.