Fiscal consolidation in Spain: dynamic interdependence of public spending and revenues

Meeting fiscal targets set out in the Stability and Growth Pact for EMU countries requires the correction of fiscal imbalances. We consider what is the most efficient strategy to achieve permanent reductions in fiscal defficits in Spain. We analyse the possible interdependence between expenditure and revenues by performing standard Granger causality tests. We find that there is a bias towards defficit in public sector size and long-run bidirectional causality between public revenues and expenditure, although the direction of causality seems to hold mainly from public expenditure to revenues. Achieving fiscal consolidation should be based reducing structural public expenditure. (Copyright: Fundación SEPI)