Type: Working Paper
Rolling Back the Public Sector: Differential Effects on Unemployment, Investment and Growth
Working Paper, CEPR Discussion Paper, 2005/4896
VAN DER PLOEG, Frederick, Rolling Back the Public Sector: Differential Effects on Unemployment, Investment and Growth, CEPR Discussion Paper, 2005/4896 - https://hdl.handle.net/1814/4448
Retrieved from Cadmus, EUI Research Repository
The macroeconomic effects of different ways of rolling back the welfare state are analysed. Cutting public spending on market goods induces a lower interest rate, a higher wage, a lower capital stock and a fall in employment. Cutting public employment or the labour income tax rate leads, in contrast, to a lower wage, a higher interest rate and a higher capital stock. Employment rises on impact. If the extra revenues of rolling back the welfare state are handed back via a lower tax rate rather than a lump-sum subsidy, both cutting public employment and cutting public spending on market goods induce an investment boom. Making the tax system less progressive by cutting tax credits and the labour income tax rate induces an investment boom as well. The effects of endogenous growth, adjustment costs for investment and non-Walrasian labour markets on these results are considered as well.
Cadmus permanent link: https://hdl.handle.net/1814/4448
Series/Number: CEPR Discussion Paper; 2005/4896
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