In Praise of Expansionary Fiscal Contraction

14 Pages Posted: 7 Feb 2015

See all articles by Tim Congdon

Tim Congdon

Institute of Economic Affairs (IEA)

Date Written: February 2015

Abstract

Textbook orthodoxy maintains that increases in the cyclically adjusted budget balance (i.e. reductions in the deficit) withdraw demand from an economy. Those Keynesian economists who believe that fiscal policy is the most powerful single influence on changes in demand expect ‘fiscal contraction’ to be accompanied by below‐trend growth or even declines in output. This article, a response to Martin Wolf's 2013 Wincott Memorial Lecture, considers this Keynesian view. Using a database prepared by the International Monetary Fund, it shows that since the 1980s ‘expansionary fiscal contractions’ have been the norm and not the exception in the USA and the UK. Keynesian support for fiscal activism is unsupported by a large body of recent evidence.

Keywords: budget balance, fiscal contraction, Great Recession, Keynesianism

JEL Classification: E12, E62, E63, E65

Suggested Citation

Congdon, Tim, In Praise of Expansionary Fiscal Contraction (February 2015). Economic Affairs, Vol. 35, Issue 1, pp. 21-34, 2015, Available at SSRN: https://ssrn.com/abstract=2561653 or http://dx.doi.org/10.1111/ecaf.12110

Tim Congdon (Contact Author)

Institute of Economic Affairs (IEA) ( email )

2 Lord North Street
London SW1P 3LB
United Kingdom

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