NORDSCI Conference proceedings 2019, Book 2

Economics and tourism

POSSIBILITIES AND LIMITS OF THE USE OF COUNTER-CYCLICAL FISCAL POLICY IN EURO AREA COUNTRIES

Assoc. Prof. Marta Martincová, PhD. 

ABSTRACT

If a country becomes part of a monetary union, it loses one of the key macroeconomic stabilization instruments, the monetary policy. Fiscal policy, therefore, appears to be an ideal tool in the event of asymmetric shocks and should fully replace monetary policy instruments. In general, fiscal policy should act counter-cyclically. This means that at a time of economic slowdown, when household incomes are low, corporate profits are declining and consumption is low, tax revenues are falling, and unemployment support spending and other social benefits are increasing. As a result, expenditures in the state budget are growing and fiscal policy is automatically expansive. The 2008 crisis has had a negative impact on euro area economies. The euro area governments' stimulus measures were to complement the role of automatic stabilizers, taking into account that they were in line with the Stability and Growth Pact and the Lisbon Strategy for Growth and Jobs. In the event of a cyclical downturn, automatic stabilizers provide an automatic bumper for private demand through state budget measures. They mainly reflect rising unemployment and other social security benefits on the expenditure side and a decline in tax revenue on the revenue side. On the contrary, they operate in the case of a cyclical recovery, when automatic budget measures hinder private demand. In our paper, we analyze the situation, if automatic stabilizers provide an automatic bumper for private demand through built-in state budget measures in the case of a cyclical downturn. From the methodological point of view, we used mainly the comparison method, on the basis of which we compare the use of countercyclical fiscal policy in individual selected euro area countries. A fiscal position is commonly used to measure the impact of discrete fiscal policies on government finances. Fiscal stimulus packages adopted by individual governments in response to the economic crisis are a subset of discrete fiscal policies. However, the fiscal position is also influenced by political factors that are beyond government control. Correct measurement of the fiscal position may be disrupted by incorrect estimation of the output gap in real time, which complicates the distinction between cyclical and politically related changes.

KEYWORDS

fiscal policy, counter-cyclical measures, fiscal position, fiscal stimulus 

REFERENCE

NORDSCI Conference Proceedings 2019, Book 2, Conference Proceedings, ISSN 2603-4107, ISBN 978-619-7495-06-5, POSSIBILITIES AND LIMITS OF THE USE OF COUNTER-CYCLICAL FISCAL POLICY IN EURO AREA COUNTRIES, 145-150 pp, DOI paper 10.32008/nordsci2019/b2/v2/17