Social Insurance and the Public Budget
Dept. of Economics, University of Aarhus WP 1998-9
Posted: 8 Aug 1998
Restraints on the public budget limit the ability of the public sector to use financial markets for intertemporal substitution. This interferes with the role of the public budget as a buffer which provides insurance and possibly stabilizes income and thereby private consumption. We consider this insurance or stabilizing role of public budgets and show why a progressive taxation system may be optimal even when the distortionary effects of taxation 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.
JEL Classification: H20, H61, E62, D61, D80
Suggested Citation: Suggested Citation