A CGE MODEL OF THE IMPACT OF MILITARY EXPENDITURES AN AIR BASE: An Updated Evaluation the Azores case

The current paper develops a model to analyse the impact of cutbacks in a military base with application to the Lajes Air Base where the US maintains a military contingent. The model is an updated version of the modeling platform of the Azorean economy - AzorMod - which, in the past, was used to do various impact analyses including the impact of this base. Eight scenarios were used to obtain results, varying according to assumptions and investments to be undertaken (scenarios A1- cut staff but keep investments, A2 - cut staff and cut investments proportionally, and A3 - cut staff and stop investments), assuming full closure (scenario B - eliminate staff and investment) and assuming mitigating policies (scenarios C1, C2, D1 and D2). GDP, as expected, falls between 0,07% and 0,09% (26,6 to 34,2 million euros per reference to the current GDP). All the basic scenarios (A and B) point to negative impacts on GDP. The scenarios that produce only positive and significant impacts are those that contemplate mitigation policies. Private consumption will fall between 0,65% and 2,03%; foreign balances will deteriorate in the presence of reduced trade both in imports and exports; Unemployment will rise between 0,33 and 0,7 percentage points (363 to 770, assuming a labor force of 110.000), meaning less jobs; Gross Fixed Investment will fall as much as 0,07% and; Private GDP will fall between 0,12% and 0,33% in the main scenarios. One major concern of the cutbacks in expenditures on the base is the impact on private welfare. To measure this impact, the model uses equivalent variation (a measure of the currency value of compensation to leave the households as well off as they were before a shock or change). The equivalent variations estimate point to a fall in welfare equivalent to a loss of 18 to 47 million euros, depending on the intensity of the cuts. The upper limit is associated to the full closure scenario. The mitigation policies considered would tend to invert the falling tendency of welfare but would do it only temporarily, while extra transfers persist. The lowest income group is the one that suffers the most in relative terms and does not gain even with the mitigation policies. This can be due to the fact that compensating expenditures follow the structure of past government expenditures. Higher income groups tend to be the major beneficiaries of these policies and were the least affected by the cutbacks in relative terms. Given the overall results of the simulations undertaken support is provided for the decision to subscribe mitigation policies. However, those simulation results also suggest that it makes a difference what specific policies are undertaken. Replenishing the public budget and allowing expenditures according to the current structure will tend to favor public initiatives as opposed to private entrepreneurship.