Long‐term effects of fiscal policies in Portugal

Purpose - This paper seeks to estimate the long‐term effects on output of different fiscal policies in Portugal. Design/methodology/approach - Results are obtained from accumulated impulse response functions associated with unrestricted VAR models that include several public spending and taxation variables in addition to output. Findings - Empirical results suggest that the effects of fiscal policies are within the Keynesian paradigm for public investment and direct taxation. In turn, non‐Keynesian effects dominate in the case of intermediate public consumption and indirect taxation where the effects are negligible. Practical implications - Cuts in public consumption and increases in indirect taxations seem to be the most desirable instruments for fiscal consolidation in Portugal. Also, deficit‐neutral policies that offset increases in public investment with increases in indirect taxes have long‐term positive effects on output. The same is true for cuts in direct taxation offset with cuts in all forms of public spending except for public investment. Originality/value - This is one of the few papers in this literature to use disaggregated public spending and taxation data. It is also a seminal application to the Portuguese case.