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The consequences of fiscal stimulus on public debt: a historical perspective

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  • W. D. McCausland
  • I. Theodossiou

Abstract

The current policy agenda of neoclassical macroeconomics, as expressed within conservative political circles in the UK and European Union, is that fiscal contraction is the lever that can bring about recovery from the current economic downturn. Allegedly, the reason is that when business sees that the government balance sheet is improving—and public debt declining—there will be greater confidence in the country’s economic prospects, and this increased confidence will lead to higher investment. This in turn will lead to growth and the road to economic recovery. This study examines the impact of government stance on public debt for 11 OECD countries for which data on the relevant factors are available from 1881 to 2011. Contrary to traditional predictions, it turns out that over this long historical span, fiscal contractions deteriorated rather than improved public debt as a percentage of GDP. This implies that fiscal austerity exacerbates the lack of demand and deteriorates rather than enhances the prospects of economic recovery.

Suggested Citation

  • W. D. McCausland & I. Theodossiou, 2016. "The consequences of fiscal stimulus on public debt: a historical perspective," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 40(4), pages 1103-1116.
    • Handle: RePEc:oup:cambje:v:40:y:2016:i:4:p:1103-1116.
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    File URL: http://hdl.handle.net/10.1093/cje/bev059
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    Cited by:

    1. Vu Cuong, 2018. "New Direction For External Borrowing Mobilization As A Development Financing Source Of The Socialist Republic Of Vietnam," International Trade and Trade Policy, ФГБОУ ВО "Ð Ð¾Ñ Ñ Ð¸Ð¹Ñ ÐºÐ¸Ð¹ Ñ ÐºÐ¾Ð½Ð¾Ð¼Ð¸Ñ‡ÐµÑ ÐºÐ¸Ð¹ ÑƒÐ½Ð¸Ð²ÐµÑ€Ñ Ð¸Ñ‚ÐµÑ‚ им. Г.Ð’. Плеханова", issue 2.
    2. Mia Gray & Anna Barford, 2018. "The depths of the cuts: the uneven geography of local government austerity," Cambridge Journal of Regions, Economy and Society, Cambridge Political Economy Society, vol. 11(3), pages 541-563.
    3. Attahir Babaji Abubakar, 2020. "Does fiscal tightening (loosening) reduce public debt?," African Development Review, African Development Bank, vol. 32(4), pages 528-539, December.
    4. Pompeo Della Posta & Enrico Marelli & Marcello Signorelli, 2020. "A market‐financed and growth‐enhancing investment plan for the euro area," Metroeconomica, Wiley Blackwell, vol. 71(3), pages 604-632, July.

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