Trade-Off of Fiscal Austerity in the European Debt Crisis in Slovenia

In this paper, we investigate the trade-off between the need for budget consolidation and the desirability of expansionary fiscal policies as a means of demand management by simulating alternative scenarios with a macroeconometric model of the Slovenian economy. The simulations show that for the Slovenian economy, an expansionary fiscal policy is neither feasible nor desirable: it leads to unsustainable government debt and has only weak effects on income and employment. It turns out that the stability program of the Slovenian government and the related policy prescriptions of the EU lead to reasonable results in terms of public debt without strong adverse effects on output or unemployment. An expansionary fiscal policy is not desirable, as it results in unsustainable public debt without enhancing employment and output sufficiently. © 2013 International Atlantic Economic Society.