On March 4, 2026, Reinhard Neck (Alpen-Adria-University of Klagenfurt, Austria), gave a virtual presentation based on articles published in Public Sector Economics. The goal was to determine optimal fiscal policy design for macroeconomic stabilization of a small open economy in the Eurozone.

Authors of the article (Dmitri Blueschke, Klaus Weyerstrass, Reinhard Neck, and Miroslav Verbič), used the results of a survey among Slovenian politicians in order to quantify the main objectives of policy makers. These are transformed into an objective function for an optimal control problem with a macroeconometric models for Slovenia as a dynamic constraint, to determine fiscal policies taking account of policy makers’ preferences. This objective function, together with the macroeconometric model SLOPOL12, is then used to calculate optimal fiscal policies for the economy until 2030. The optimal combination of fiscal policy takes into account the main trade-off between employment stabilization on the one hand and budget sustainability on the other. Instruments with both demand and supply side effects (direct taxes and public investment, especially investment in research and development, and human capital) are used to stabilize output and employment, while government consumption and other instruments with only demand side effects are assigned to budget consolidation. 

The results are rather similar in different scenarios (“business as usual”, boom, and recession) and only mildly counter-cyclical. They suggest that a relatively robust mix of restrictive and expansionary instruments delivers the best outcomes.

Presentation was moderated by Luka Draganić, researcher at the Institute of Public Finance. A recording and a presentation of this interesting lecture are also available.