Trade-offs of Fiscal Austerity in the European Debt Crisis: The Case of Slovenia

In this paper, we investigate the trade-off between the needs 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 that the Stability Programme 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 and unemployment. An expansionary fiscal policy is not desirable as it results in unsustainable public debt without enhancing employment and output sufficiently.