The effect of income distribution and fiscal policy on growth, investment, and budget balance: the case of Europe

Thomas Obst, Ozlem Onaran and Maria Nikolaidi

No 16088, Greenwich Papers in Political Economy from University of Greenwich, Greenwich Political Economy Research Centre

Abstract: This paper develops a multi-country Post-Kaleckian model augmented by a government sector with public spending and taxes on consumption, labour and capital and estimates it for the EU15 countries. We estimate country specific equations to find the effect of income distribution, public spending and taxes on growth, on each component of private aggregate demand (i.e., consumption, investment, and net exports) and on budget balance for the EU15 countries. Next, we calculate a Europe-wide multiplier based on the responses of each country to changes not only in domestic income distribution, taxation and government expenditure but also to changes in the other European countries’ wage share, taxes and public spending. One novelty of this paper is that it goes beyond an isolated country-by-country analysis and integrates cross-country effects of a simultaneous change in the wage share on demand in Europe in a government augmented Post-Kaleckian model.Extending the model by taxes on labour and capital increases the likelihood of a wage-led economic regime. The fiscal multiplier effects are much stronger when policies are implemented simultaneously, and wage, tax and public spending policies are integrated into the policy mix. The impact of egalitarian wage policies are positive but small; the overall stimulus becomes much stronger when mixed with fiscal expansion. Expansionary fiscal policy is sustainable when wage, public spending and progressive tax policies are combined. The analysis of the paper can guide the development of a fiscal and wage policy mix conducive to equitable development.

Keywords: Wage share; growth; European multiplier; demand regime; government sector; public spending; tax policy (search for similar items in EconPapers)
JEL-codes: E12 E22 E25 E62 (search for similar items in EconPapers)
Date: 2017-01-01
New Economics Papers: this item is included in nep-eec, nep-mac and nep-pbe
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Citations: View citations in EconPapers (9)

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http://gala.gre.ac.uk/id/eprint/16088/13/GPERC_obs ... VERSION_04042017.pdf

Related works:
Working Paper: The effects of income distribution and fiscal policy on growth, investment and budget balance: the case of Europe (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:gpe:wpaper:16088

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