Fiscal stimulus and the improvement of fiscal space by economic growth: a study of European countries with low economic growth

Abstract

This thesis examines what would be the impact of fiscal stimulus on the fiscal debt of GDP in the low economic growth conditions to conclude, whether the fiscal stimulus tightens or improves the government fiscal space. This is studied by comparing the change in the fiscal debt of GDP when the fiscal policy is used to stimulate the economy, with the case that the government does not stimulate. The increase in the economic growth that is achieved by the fiscal stimulus, which is a one per cent increase in the government spending of GDP, is measured by the fiscal multiplier. The fiscal multiplier is estimated in the period 2004Q1-2015Q2 using the estimation sample that consist of the European countries: France, Italy, Portugal, Spain, Slovenia and Finland. Also, it is examined what is the economic growth that is needed in the countries to achieve an improvement in the fiscal budget deficits from the year 2014 level, a one per cent fiscal surplus of GDP by the end of the year 2019. The differences between countries in the size of the fiscal budget deficits sets the countries in different positions in the capability to achieve the economic growth that also would lead to the targeted improvement in the fiscal budgets. The study is further used to assess, how the differences between the countries on the recovery in the economic growth have led to that the countries are in different positions in terms of what is a need for the fiscal policy to stimulate the economy.