The impact of government budgets on prices: Evidence from macroeconometric models

The short-term impact of fiscal variables on prices is assessed on the basis of harmonised simulations conducted with six well-established models used by the ECB and five national central banks of the Euro system. A broad consensus appears whereby changes in government demand and in households’ direct taxes have a limited impact on prices in the first year while, in contrast, changes in indirect taxes and employers’ social security contributions have a relatively large impact. The second year results show that the effects usually take time to materialise fully, becoming often large for the public consumption shock. Shifts in the composition of budgets are shown to matter far more than the corresponding changes in the fiscal balance as such.