| Abstract [eng] |
The main purpose of the Master’s thesis is to evaluate the effects of fiscal consolidation in Lithuania. Fiscal consolidation is understood as the reduction of government spending and the incensement of government taxation. The work is consisted of three main parts: literature overview, introduction to the research methodology and the research itself. During the literature overview, it was revealed, that fiscal austerity can have both negative and positive effects on a country’s economy. The positive effects are mainly associated with expectations, the wealth effect, interest rates and the changes in labor market equilibrium. Negative effects are emphasized mainly by Keynesian economics. The latter suggest that a cut in government spending can decrease aggregate demand which in turn acts as a negative factor for the economy. A case study of various countries that implemented fiscal austerity measures revealed that fiscal consolidation can have both negative and positive effects. Lastly, analysis of empirical papers on the effects of fiscal consolidation showed that VAR and SVAR modeling is the most prominent method of analysis of fiscal austerity. Also it was concluded, that using models with government revenues and tax receipts as fiscal variables might give biased results because of the whole systems’ interdependency. The second part of the thesis – methodology – introduced to the concept of unit root tests, VAR, impulse response functions and the VECM. The third part – the research – was mainly conducted of 3 parts. In the first, a SVAR model of Lithuania’s GDP, government expenditures and tax revenues showed that indeed these three variables are strongly interdependent. The VECM of these variables showed that the government tax receipts variable is weakly exogenous. To deal with the interdependency problem, new fiscal variables were constructed in the second part. Value added (VAT), income and corporate profit taxes were chosen as representatives for the tax receipt variable. The government expenditure variable vas created as a difference between government tax receipts and expenditures and expressed as a percentage of GDP. The third part was the analysis of impulse response functions of SVAR models between the new fiscal variables and selected Lithuania’s macroeconomic variables. The analysis showed that a VAT tax increase due to tariff changes has a negative effect on the country’s GDP and consumption. The income tax tariff increase had a negative, yet fading out effect on Lithuania’s GDP and consumption. Lastly, corporate profit tax increase due to tariff changes had a negative effect GDP and gross fixed capital investments. It also had a slight increasing effect on unemployment and had no effect on wages. On the contrary, government expenditure cuts had a positive effect on Lithuania’s GDP, consumption. Gross fixed capital formation and unemployment slightly fell while responding to a government expenditure contraction. It was concluded, that policy makers in Lithuania should be very careful if they would choose to implement fiscal austerity through tax increases, as changes in all three taxes can have negative effects. If politicians in Lithuania would try to apply fiscal consolidation measures, it should be done through government expenditure cuts first. |
