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

Marta C. N. Simões (), Adelaide P. S. Duarte () and João Andrade
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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

No 2015-16, GEMF Working Papers from GEMF, Faculty of Economics, University of Coimbra

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.

Keywords: social spending; inequality; economic growth; Portugal; VAR. (search for similar items in EconPapers)
JEL-codes: H53 O40 O52 P16 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2015-07
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Citations: View citations in EconPapers (1)

Published in the book The European Social Model Adrift, Routledge

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Persistent link: https://EconPapers.repec.org/RePEc:gmf:wpaper:2015-16

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