Fiscal policy and economic activity: New Causal Evidence

David Brasington and Marios Zachariadis

University of Cyprus Working Papers in Economics from University of Cyprus Department of Economics

Abstract: We identify an exogenous cut in local taxes accompanied by an equivalent reduction in local government spending, and estimate the impact of these exogenous changes on income by applying a novel regression discontinuity design. This exploits a unique regional dataset that combines local income data with local voting outcomes on renewals of current expense tax levies. We find that balanced budget reductions in taxes and spending cause a large drop in local incomes, suggesting that government expenditure effects on income are larger than fiscal revenue effects. Importantly, this effect of local tax-financed government spending is prominent in low-income areas. Overall, our results regarding the effect of locally tax-financed government spending on income are suggestive of the importance of mechanisms related to the prevalence of liquidity constrained agents.

Keywords: Balanced budget; government spending; tax levies; exogenous variation (search for similar items in EconPapers)
JEL-codes: E62 H30 H72 R11 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2022-11-18
New Economics Papers: this item is included in nep-pbe, nep-pub and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:ucy:cypeua:09-2022

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