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Macroeconomic effects of cost savings in public procurement

Listed author(s):
  • Lukas VOGEL

The paper analyses the macroeconomic gain from cost savings in public procurement in an extended version of QUEST III. Labour tax cuts in response to cost savings from cheaper procurement (0.5 pp mark-up decline per year over 10 years and 20% of procurement) raise GDP, employment and consumption by 0.1% after 5 and 0.1-0.2% after 50 years. Alternative policies, such as lower capital taxes and higher public investment, have comparable or stronger long-run GDP effects, lower or comparable consumption effects, and zero employment effects. Supply expansion under lower capital taxes and higher public investment derives from higher investment. Benefits are approximately linear to the size of cost savings and depend on key parameters, such as the elasticity of labour supply or the productivity of public capital.

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Paper provided by Directorate General Economic and Financial Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers 2008 - 2015 with number 389.

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Length: 15 pages
Date of creation: Nov 2009
Handle: RePEc:euf:ecopap:0389
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