A Handbook of Alternative Theories of Public Economics
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A Handbook of Alternative Theories of Public Economics

Edited by Francesco Forte, Ram Mudambi and Pietro Maria Navarra

This comprehensive and thought-provoking Handbook reviews public sector economics from pluralist perspectives that either complement or reach beyond mainstream views. The book takes a comprehensive interdisciplinary approach, drawing on economic elements in the fields of philosophy, sociology, psychology, history and law.
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Chapter 5: Deficits, tax burden and unemployment

Silvia Fedeli and Francesco Forte


This chapter, with an econometric analysis of 19 OECD countries from 1981 to 2009, shows that fiscal policies generating deficit lead to the disappearance of the fair chances of pursuing welfare in the long run, causing instead a high unemployment rate. The non-conventional conclusion is that a fiscal constitution prescribing to balance the budget is beneficial to the working class. We focus on the long-term relationship between the unemployment ratio (UR), the net lending government ratio to GDP (NLG/GDP), and the tax burden (total receipts on GDP). Our present research is an extension of Fedeli and Forte (2012) who, showing a co-integrating relation between unemployment rate and net lending government ratio to GDP for OECD countries, demonstrated that, in the long run, deficit policies, whether on the expenditure or on the revenue side, are germane to unemployment. The insight of Fedeli and Forte (2012) is that public deficit and unemployment are intertwined in the long run. In the present chapter we further investigate this same theme focusing on additional questions on whether high tax burdens are favorable or unfavorable to employment and on the short-term determinants of UR. Adding to the theme, the role of the level of taxation is not a mere intellectual exercise, given that, as shown in the present chapter, the result is that high taxes added to deficit spending aggravate unemployment: a dramatic conclusion follows with respect to the structure and role of the welfare state in the advanced economies.

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