The global financial crisis of 2007 has resulted in large macroeconomic imbalances and there were reduction in economic activity (Eurwork, 2015). This led to fall in fiscal position of the European Union. Government in the European Union has faced pressure to reduce the public expenditure. In case if the Government is unable to pay the debt, then the deficit reduction measures are undertaken for safeguarding the fiscal sustainability of public finances (The Telegraph, 2015). The public expenditures are reduced by imposing employment restrictions and introducing wage policy, pension transfer and social transfer. However, Slovenia undertook the measures of packaged austerity in order to maintain the public finances (Eurwork, 2015).
The measures undertaken by Slovenia include the organizational measures to streamline the costs along with other rationalization measures (United Nations Human Rigths, 2015). The measures covered investment as well as subsidies, labor market policy as well as social security policies. The Government in Slovenia began to merge the expenditure side of the budget in 2012 which involved the public sector costs. The Balancing of Public Finances Act, 2012 aims to achieve sustainable public finances and ensure the macroeconomic stability (United Nations Human Rigths, 2015). The Act involved the fact that the resources should be used carefully and has fixed the costs for various resources. Moreover, the new pension program comprises of the adjustment of existing pension system to the new demographic as well as economic circumstances and ensures the long-term fiscal stability (Investment and Pensions Europe, 2015). The report covers the financial situation in Slovenia after the global financial crisis as well as carries detailed information regarding the Slovenian Austerity Program.
In case of the Keynesian Cross Model, income level is equal to the output level in Slovenian economy. The second part is that there should be equality between the aggregate expenditure and output. Individuals in the economy earn the income based on their production of the goods and services (Barreto, 2015). Hence, it can be said that the income is equivalent to the output level. As the income equals the output levels in Slovenian economy the expenditure levels also equates the output. Every good that are produced in the economy are either consumed or added to the inventory. Keynesian Cross Model indicates that the equation for national income is given as follows.
Where Y is considered as the national income, I is the aggregate investment, C is the aggregate consumption level, G is the government spending, X and M are the exports and imports in the economy (Blanchard, Amighini and Giavazzi, 2010). There is rise in disposable income with the rise in consumption in the economy and as a result, there is rise in aggregate demand in the economy. According to Keynesian Cross Model, there is full employment in the economy of Slovenia where the aggregate demand curve equates the national income (Blanchard, Amighini and Giavazzi, 2010). There are shifts in the demand curve with the rise and fall in the aggregate demand components within Slovenian economy and along within the import and export of goods and services there is exchange of Euro (Blanchard, Amighini and Giavazzi, 2010). Slovenia is a part of European Union and therefore the national income of the country is based on total Euros earned with the export of goods and services (Blanchard, Amighini and Giavazzi, 2010).
Figure 1: Equilibrium by Keynesian Cross Model in Slovenia
nbsp;(Source: Author’s Creation)
As per the IS-LM model, the goods market equilibrium condition in Slovenian economy states that production Y should be equal to the demand for goods, Z. The relation is known as the IS relation. The demand for goods is the sum of consumption, investment as well as government spending and the consumption is considered to be a function of disposable income (Mitchell and Wray, 2013). The investment spending, taxes as well as government spending are considered as given.
The relation between the consumption, C as well as disposable income, Y-T is linear. By incorporating Y in place of Z, the equilibrium condition is as follows.
In this case, the interest rate does not affect demand for goods. Moreover, if the impact of interest rate on investment is considered, then the equation is written as follows.
The equation implies that the investment I depends on production Y and the interest rate i. However, an increase in the production level would increase the level of investment in the economy but an increase in interest rate would have a negative impact on investment. The new goods market equilibrium condition is as follows
As per the equation, an increase in the output level leads to the increase in income as well as increase in disposable income. The goods market equilibrium condition indicates that a rise in interest rate leads to a fall in output level and so, the IS curve is downward sloping. The study related to the economic situation in Slovenia indicates that the investment is boosted by the local infrastructure projects. The private consumption within the economy is increased with the consumer confidence and job creation within the industries in Slovenia (Blanchard, Amighini and Giavazzi, 2010).
Figure 2: Shape of IS Curve
(Source: Author’s Creation)
The legal entities in Slovenia perform for the profit activities and have either limited or unlimited tax liability. Moreover, excise duty is paid within the territory of the Republic of Slovenia and the goods that are subjected to the excise duty are imported within European Union (Blanchard, Amighini and Giavazzi, 2010).