Social Insurance and the Public Budget

17 Pages Posted: 8 Feb 2003

See all articles by Torben M. Andersen

Torben M. Andersen

University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Robert Rene Dogonowski

Aarhus University - Department of Economics and Business Economics

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Abstract

Restraints on the public budget may limit the ability of the public sector to use financial markets for the diversification of shocks. This interferes with the role of the public budget as a buffer which may provide insurance by stabilizing income and thereby private consumption. We consider this insurance or stabilizing role of public budgets and show why pro-cyclical budgets and a progressive taxation system may be optimal even when tax distortions are taken into account. Balanced budget restrictions interfere with this insurance effect, and they do not necessarily imply that a lower level of public consumption is optimal.

Suggested Citation

Andersen, Torben M. and Dogonowski, Robert Rene, Social Insurance and the Public Budget. Available at SSRN: https://ssrn.com/abstract=320548

Torben M. Andersen (Contact Author)

University of Aarhus - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Centre for Economic Policy Research (CEPR)

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IZA Institute of Labor Economics

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Robert Rene Dogonowski

Aarhus University - Department of Economics and Business Economics ( email )

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