Long-term effects of tax adjustment on the Sergipe’s economy

Abstract

This paper aims to estimate the long-term effects of the fiscal cut, conducted by the federal government, on the Sergipe economy. To do so, we use simulations with a dynamic Computable General Equilibrium model, base year 2013, built for the 27 Brazilian states and 67 sectors. In this approach, it is considered that private investments react only to changes in rates of return on capital rather than changes in expectations. The results indicate that the fiscal adjustment attenuated, in 2035, the accumulated growth of Sergipe's real GDP by 12% in relation to the baseline scenario. Furthermore, at municipality level, the results are quite heterogeneous due to the different levels of dependence on public expenditures.