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Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.
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Portugal - Assessing the Risks Around the Speed of Fiscal Consolidation in an Uncertain Environment
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- Stéphane Sorbe1
- Author Affiliations
- 1: OECD, France
- 19 sep 2012
- Bibliographic information
This paper illustrates possible trade-offs between two different fiscal consolidation strategies in Portugal: sticking to the nominal fiscal targets in the EU-IMF programme or allowing automatic stabilisers to work, while sticking to the structural primary deficit targets implied by the programme. The analysis is based on stochastic simulations in which random shocks affect the main economic variables in the framework of a small macroeconomic model. The model captures the mutual interdependences between the fiscal position, financial conditions and activity and notably the impact of public debt developments on investors’ confidence and interest rates. Results suggest that under the large fiscal consolidation programme that is currently implemented, both fiscal policy strategies considered would in most cases result in sustainable debt dynamics. Both strategies also entail risks, but of a different nature: the risk of a deeper recession if sticking to nominal targets and the risk of higher debt if letting automatic stabilisers play. Sensitivity analyses show that these risks could be reduced by stimulating potential growth through structural reform and by choosing "growth friendly" fiscal consolidation instruments that have lower multipliers. By reducing recessionary risks, a small fiscal multiplier also increases the relative benefits of sticking to nominal deficit targets, while the benefits of automatic stabilisers are larger if the multiplier is high. This Working Paper relates to the 2012 OECD Economic Survey of Portugal (www.oecd.org/eco/surveys/portugal).
- fiscal multipliers, Portugal, fan charts, automatic stabilisers, risk analysis, public debt sustainability
- Classification JEL:
- C53: Mathematical and Quantitative Methods / Econometric Modeling / Forecasting and Prediction Methods; Simulation Methods
- E62: Macroeconomics and Monetary Economics / Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook / Fiscal Policy
- H63: Public Economics / National Budget, Deficit, and Debt / Debt; Debt Management; Sovereign Debt