Back to fiscal rules: The insanity of normality, unless the rich pay for it!

Alberto Botta, Eugenio Caverzasi () and Alberto Russo
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Eugenio Caverzasi: Department of Economics, Università degli Studi dell’Insubria, Varese, Italy

No 2024/07, Working Papers from Economics Department, Universitat Jaume I, Castellón (Spain)

Abstract: With central banks and national governments returning to more conservative monetary and fiscal policies after Covid, the debate about the macroeconomic effects of fiscal rules has revamped. We address this topic via an extended version of the hybrid ABM-SFC model in Botta et al. (2024) that includes a Taylor-type monetary policy rule and a variety of fiscal rules aimed at reducing the public debt-to-GDP ratio. We compare spending-based fiscal rules vastly advocated by international economic institutions with wealth tax-based fiscal policies. We do this in the context of a modern financialized economy where securitization and complex financial products like Asset-Backed Securities (ABS) alter economic dynamics and the effectiveness of monetary policy in controlling inflation. We assume heterogeneous households to track how alternative fiscal strategies affect income and wealth inequality. Our findings are threefold. First, spending-based fiscal rules can reduce the debt-to-GDP ratio in the long term but at the cost of significantly higher unemployment and permanently lower real GDP. Second, wealth tax-based fiscal policies reduce public debt without harming economic performance. Third, perhaps unexpectedly, in a financialized economy, spending-based fiscal austerity may hurt the relative position of rich households in wealth distribution as much as a wealth tax does; this is due to capital losses that spending cuts may eventually induce in households’ financial wealth. In the end, wealth taxes are preferable to spending cuts, and the usual political opposition against them by the rich appears largely unfounded given their potential economic benefits compared to spending-based fiscal austerity.

Keywords: Spending-based fiscal rule; Wealth tax; Securitization (search for similar items in EconPapers)
JEL-codes: E44 E63 H6 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2024
New Economics Papers: this item is included in nep-hme, nep-mac and nep-pbe
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Working Paper: Back to fiscal rules: The insanity of normality, unless the rich pay for it! (2024)
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