ON THE MIX OF GOVERNMENT EXPENDITURE AND TAX REVENUES

Abstract

We study the implications of changes in the mix of taxes, public spending, and public finance in the Eurozone. In so doing, we build a general equilibrium OLG model that naturally incorporates all the main categories of public spending and taxes. We focus on the medium- and long-run implications of permanent reforms in the actual policy mix. When we depart from 2008, the best way out of the recession would be an increase in public spending on education and health and in turn cuts in distorting taxes including social security contributions. When we depart from the year 2017, which features a higher inherited public debt, public debt consolidation becomes the superior reform to the extent that the focus is on the medium and long run.