Deficits Do Matter: They Can Improve Government Quality

4 Pages Posted: 1 Apr 2008 Last revised: 13 Feb 2018

Date Written: April 6, 2008


Economists have long debated whether deficits matter. They do, but perhaps more for replacing voting markets that reward politically attractive redistribution with financial markets that can better support productivity. Tax-funding mechanisms evaluate proposals to spend public resources in light of distributional consequences, not against the standard of whether public actions broadly expand economic opportunities. To attract funding through deficit financing, on the other hand, public spending proposals must reasonably promise to strengthen society's repayment ability. Moreover, financial markets (not voting markets) transparently report on the credibility of such promises by continually evaluating the price at which government obligations are traded. Having to borrow, not balance budgets, can productively discipline governments by charging a high price for funds that would facilitate transfers while readily supporting public projects that strengthen economic performance.

Keywords: Balanced budgets, public spending, deficits, financial market discipline, economic performance

JEL Classification: D70, E62, G32, H11, H62

Suggested Citation

Falaschetti, Dino, Deficits Do Matter: They Can Improve Government Quality (April 6, 2008). FSU College of Law, Law and Economics Paper No. 08-02, Available at SSRN: or

Dino Falaschetti (Contact Author)

US Treasury ( email )

Office of Financial Research
Washington, DC District of Columbia 20220
United States

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