This paper investigates the welfare effects of fiscal consolidation plans that involve cuts in social expenditure using a model with heterogeneous agents and incomplete markets. The study makes two key contributions. Firstly, it proposes a new approach to modeling household social expenditure consumption, generating a consumption distribution consistent with empirical evidence. The provision of in-kind benefits plays a critical role in reducing household income inequality. Secondly, the paper assesses the distributional welfare consequences in both the short and long term of public debt deleveraging, considering different speeds and instruments for consolidation. The findings indicate that the welfare gains in the long run associated with consolidation through social expenditure retrenchments outweigh the short-term welfare losses. Households in the lowest income quintiles benefit the most in the long run but also experience the most significant short-term negative impacts during the consolidation if we exclude price effects. The plausibility of the price effects generated during fiscal consolidation is crucial in determining the distributional welfare consequences of such a plan and the most preferred speed for consolidation. 

This paper examines how fiscal integration can impact sovereign default risk in heterogeneous indebted countries, focusing on the effects of the Recovery and Resilience Facility for Member States (MS) of the EU-27. We analyze the implications of the program on the default incentives of MS and its effects on sovereign bond prices and welfare. We model the European Commission as a supranational fiscal authority and 'quasi-sovereign' that competes with MS for loans in the financial market, using a quantitative model with two sovereigns that interact with a fiscal authority and risk-averse international lenders over three periods. Our analysis reveals that the program generates multiple and opposing effects on the financing conditions of Member States, including crowding out and redistribution effects. In particular, the supranational fiscal authority crowds out Sovereigns debt but also helps to redistribute funds. Despite these effects, the program has an overall positive impact, leading to significant aggregate welfare gains. The benefits are particularly pronounced for high-debt, low-revenue member states, as the program helps to relax their borrowing constraints. Additionally, even Sovereigns that do not directly benefit from the transfer scheme still benefit from the bailout of highly indebted countries, generating positive spillovers. This risk-sharing mechanism enhances financial stability and reinforces the European Union's solidarity.

   This paper examines the impact of heat stress adaptation investment on public finances, amid escalating temperatures.  We construct an overlapping generations model to characterize  the optimal adaptation investment and to quantify the resulting strain on public finances. The case of Spain, an economy with heightened vulnerability to rising temperatures, serves as our case study. Our analysis reveals that current adaptation spending significantly falls short of optimal levels, resulting in increased medical expenses and reduced tax revenues. By quantifying these fiscal impacts, we show that optimal adaptation investments could substantially enhance labor productivity and social welfare.