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How much can European governments squeeze out of their taxpayers?

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Listed:
  • Jean-Michel Courtault

    () (CEPN, Université Paris 13 and Sorbonne Paris Cité)

  • Riccardo Magnani

    () (CEPN, Université Paris 13 and Sorbonne Paris Cité)

Abstract

In this paper we use the concept of distributable surplus, introduced by Allais (1943) and Luenberger (1992), to evaluate the capacity of European countries to repay their debts. We first show that the surplus generated between 2005 and 2009 was not sufficient to cover the 2009 deficit for Greece, Ireland, Spain and the UK. In order to generate a surplus equal to the 2009 deficit, these countries would have had to reduce their initial well-being. Assuming that no reduction of well-being is acceptable by the community, we use Computable General Equilibrium (CGE) models to simulate different policies that can be implemented in order to generate sufficient surplus. We show that the results are very sensitive as to whether we consider deficits before and after the recent financial and economic crises. Then, assuming that governments are able to capture all the distributable surpluses, we compute the date at which they are able to repay their debts. We find that most EU countries, excepted Germany and to lesser extent France and the UK, cannot achieve debt sustainability. We finally discuss the usefulness of Eurobonds.

Suggested Citation

  • Jean-Michel Courtault & Riccardo Magnani, 2014. "How much can European governments squeeze out of their taxpayers?," Economics Bulletin, AccessEcon, vol. 34(3), pages 1945-1960.
  • Handle: RePEc:ebl:ecbull:eb-14-00504
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    References listed on IDEAS

    as
    1. Hamilton, James D & Flavin, Marjorie A, 1986. "On the Limitations of Government Borrowing: A Framework for EmpiricalTesting," American Economic Review, American Economic Association, vol. 76(4), pages 808-819, September.
    2. Alfred Greiner & Uwe Köller & Willi Semmler, 2007. "Debt sustainability in the European Monetary Union: Theory and empirical evidence for selected countries," Oxford Economic Papers, Oxford University Press, vol. 59(2), pages 194-218, April.
    3. Leon Bettendorf & Michael P. Devereux & Albert van der Horst & Simon Loretz & Ruud A. de Mooij, 2010. "Corporate tax harmonization in the EU," Economic Policy, CEPR;CES;MSH, vol. 25, pages 537-590, July.
    4. Bravo, Ana Bela Santos & Silvestre, Antonio Luis, 2002. "Intertemporal sustainability of fiscal policies: some tests for European countries," European Journal of Political Economy, Elsevier, vol. 18(3), pages 517-528, September.
    5. Jeffrey J. Reimer, 2007. "Assessing Global Computable General Equilibrium Model Validity Using Agricultural Price Volatility," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(2), pages 383-397.
    6. Courtault, Jean-Michel & Crettez, Bertrand & Hayek, Naila, 2008. "A note on Boiteux' surplus function and dual Pareto efficiency," Mathematical Social Sciences, Elsevier, vol. 56(3), pages 439-447, November.
    7. Shoven, John B & Whalley, John, 1984. "Applied General-Equilibrium Models of Taxation and International Trade: An Introduction and Survey," Journal of Economic Literature, American Economic Association, vol. 22(3), pages 1007-1051, September.
    8. Devaragan, Shantayanan & Lewis, Jeffrey D. & Robinson, Sherman, 1990. "Policy lessons from trade-focused, two-sector models," Journal of Policy Modeling, Elsevier, vol. 12(4), pages 625-657.
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    More about this item

    Keywords

    Distributable surplus; public deficit; sovereign debt; debt sustainability; CGE models;

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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