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Social Spending, Inequality and Growth in Times of Austerity: Insights from Portugal

Author

Listed:
  • Marta C. N. Simões

    (Faculty of Economics, University of Coimbra, and GEMF, Portugal)

  • Adelaide P. S. Duarte

    (Faculty of Economics, University of Coimbra, and GEMF, Portugal)

  • João Sousa Andrade

    (Faculty of Economics, University of Coimbra, and GEMF, Portugal)

Abstract

This paper discusses the possibility that the austerity measures implemented in Portugal, that translate into a reduction of the respective welfare state, can not only hamper short term economic recovery but also compromise long-run macroeconomic performance, based on their impact on income inequality. We estimate a near-VAR model with social spending, inequality and output and perform impulse response analysis over the period 1980-2013 to investigate whether the recent expansion of the Portuguese welfare state constituted an obstacle or an opportunity for this country’s macroeconomic performance. Our results point to social spending as an expansionary fiscal policy instrument that can alleviate the downturn in output in the short-term. The long-term role of social spending is less clear due to its ambiguous effect on overall income inequality. We conclude that more important than the insufficient increase in social benefits due to fiscal consolidation efforts seems to be the need to carefully target social support so that there is no equity-efficiency trade-off.

Suggested Citation

  • Marta C. N. Simões & Adelaide P. S. Duarte & João Sousa Andrade, 2015. "Social Spending, Inequality and Growth in Times of Austerity: Insights from Portugal," GEMF Working Papers 2015-16, GEMF, Faculty of Economics, University of Coimbra.
    • Handle: RePEc:gmf:wpaper:2015-16
    as

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    More about this item

    Keywords

    social spending; inequality; economic growth; Portugal; VAR.;
    All these keywords.

    JEL classification:

    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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