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

Abstract

The aim of this paper is contributing to fll the gap between the macroeconomic efects of policy reforms and the microeconomic and social ones, considering simultaneously both kind of impacts. Regarding fscal adjustments, concern about the sustainability of public defcit and debt resulting from the Great Recession led governments to adopt austerity measures in most European countries. Our analysis considers the redistributive efects of such adjustments for the Spanish economy by simulating a hypothetical reduction of public defcit 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 efects of these measures as well as the efects on income distribution. The results contribute to the growing but limited literature on the distributional efects of fscal consolidations by showing that policymakers have to choose between more inequality or more poverty