Absolute Poverty and Sound Public Finance in the Eurozone

“In this paper, the relation between structural public balance adjustment and absolute poverty in 19 Eurozone countries during the time span 2005–2017 has been investigated. Absolute poverty is becoming more and more relevant in advanced economies, and due to its non-country-specific nature, it allows for a more accurate comparison among countries with very different GDP levels, which also belong to the same economic area. Structural public balance adjustments represent the tool that individual countries must use to contain their deficit and debt within the threshold.

Figure: Change in material deprivation and structural adjustment; panel yearly means

The empirical estimates presented in this paper allow us to support the conclusion that structural public balance adjustments have a direct relation with absolute poverty and that restrictive fiscal measures increase material deprivation, while expansive measures decrease it. In line with the recent debate on the efficacy of fiscal policy, this is the result of the effects of government expenditure on growth that the eventual presence of redistributive measures has not been able to counteract. The introduction in the estimates of other variables affecting poverty consolidates the results and indicates, as additional causes, the rate of inflation and trade openness. Further estimates were conducted on a reduced sample of 12 EMU countries for a longer period (1995–2017) and for the two subsamples of pre (1995–2008) and post (2009– 2017) crisis period using a dependent variable indicator of monetary poverty confirm the
existence of a direct relation between structural adjustments and the share of population living in awkward social conditions.
However, inside the European policy framework, national policies are constrained in their ability to implement autonomously fiscal policies. In the absence of a sustained rate of growth, the interaction among fiscal policy stance, government bonds yields and capital flows limits any kind of single states intervention in the fear of interest rates increase (Canale et al. 2018). Therefore, whatever their aims, national governments are very limitedly able to reconcile the objective of poverty alleviation with that of sound public finance. The increase in poverty is perceived as a kind of unavoidable consequence of fiscal profligacy.”

Source: Canale, R and Liotti, G. (2021). Absolute Poverty and Sound Public Finance in the Eurozone. Journal of Economic Inequality.

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