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Debt sustainability and policy targets: Full employment or structural balance? A simulation for the Spanish economy

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  • Uxó, Jorge
  • Febrero, Eladio
  • Ayala, Iván
  • Villanueva, Paloma

Abstract

The idea that Spain should reduce its structural fiscal deficit has been playing a crucial role in determining the orientation of its fiscal policy for the past three decades, in line with the European fiscal rules. Nevertheless, relying on unobservable variables for its estimation might lead to an underestimation of potential GDP and to the application of pro-cyclical measures in times of crisis. Following the Updated Okun Method to estimate an alternative measure of potential GDP, which targets full employment, we simulate alternative fiscal policy scenarios for Spain from 2023 to 2028. Our results point to a better performance, both in terms of public debt sustainability and reduction of the unemployment rate, when focusing on an unemployment rate target rather than on the reduction of the structural fiscal balance. This suggests a departure from this indicator in guiding fiscal policy orientation in the context of the reform of the European fiscal rules.

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  • Uxó, Jorge & Febrero, Eladio & Ayala, Iván & Villanueva, Paloma, 2024. "Debt sustainability and policy targets: Full employment or structural balance? A simulation for the Spanish economy," Structural Change and Economic Dynamics, Elsevier, vol. 69(C), pages 475-487.
    • Handle: RePEc:eee:streco:v:69:y:2024:i:c:p:475-487
    DOI: 10.1016/j.strueco.2024.03.005
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