Long-term effects of fiscal policies in Portugal

Purpose - This paper seeks to estimate the long-term effects on output of different fiscal policies in Portugal. Design/methodology/approach - Results are obtained from accumulated impulse response functions associated with unrestricted VAR models that include several public spending and taxation variables in addition to output. Findings - Empirical results suggest that the effects of fiscal policies are within the Keynesian paradigm for public investment and direct taxation. In turn, non-Keynesian effects dominate in the case of intermediate public consumption and indirect taxation where the effects are negligible. Practical implications - Cuts in public consumption and increases in indirect taxations seem to be the most desirable instruments for fiscal consolidation in Portugal. Also, deficit-neutral policies that offset increases in public investment with increases in indirect taxes have long-term positive effects on output. The same is true for cuts in direct taxation offset with cuts in all forms of public spending except for public investment. Originality/value - This is one of the few papers in this literature to use disaggregated public spending and taxation data. It is also a seminal application to the Portuguese case.