"SECTORAL BALANCES IDENTITY AND FISCAL AUSTERITY POLICY: THE CASE OF PRIVATE DELEVERAGING IN SPAIN"

Abstract

Sectoral balances analysis is useful for contextualizing the possibilities of macroeconomic policy, as
well as facilitating understanding of the dynamics of private sector borrowing. This article shows how
austerity policies carried out during the Great Recession of 2008 can lengthen economic stagnation.
Understanding this dynamic can avoid falling into this kind of error in the face of the new recession
facing the world economy because of the COVID-19 Pandemic. Throughout the article, an analysis
of the deleveraging process that characterized the dynamic of the Spanish economy in the period
2008-2016 will be carried out. Understanding the identity of sectoral balances, it would be easy to
understand how non-financial private sector of the Spanish economy could not carry out its
deleveraging process in an accelerated manner if the public sector did not incur persistent fiscal
deficits, since improving the position of the external sector did not compensate for the investment
paralysis of the private sector. In this context, public deficit reduction policies could only slow private
deleveraging and lengthen the recession.