Late in 2011, after realizing that Spain had run up an exceptionally large budget deficit for the year, exceeding 8.5% of the nation's entire GDP, the newly elected government of Mariano Rajoy set out to get Spain's fiscal situation under control.
To do that, Rajoy committed Spain to a program of spending cuts and tax hikes in 2012, as demanded by the European Commission (EC). A program that appears to have only succeeded in crashing Spain's troubled economy in 2012.
But which aspect of Rajoy's austerity program is most responsible for sinking Spain's fortunes? Was it the spending cuts? Or was it the tax rate hikes?
Believe it or not, we can answer that question! And to do it, we'll use data from the United States for its fiscal multipliers!
What's a fiscal multiplier, you ask? A fiscal multiplier is a ratio that tells us how much a nation's income, or GDP, is affected by changes in its government's spending or taxation policies. They are typically used by economists to predict how much more or less economic activity there will be in an economy as a result of a change in the levels of government spending or taxation.
That's where the data from the U.S. comes into play, because we'll use the fiscal multipliers that have been calculated for both government spending and for taxes to apply to Spain's situation in 2012 to see if we can predict how much Spain's GDP was affected by the different parts of its so-called austerity program.
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