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What is the Sign of the Balanced Budget Multiplier?

In: Debates in Monetary Macroeconomics

Author

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  • John Smithin

    (York University)

Abstract

The conventional view in economics contends that the sign of the balanced budget multiplier is positive – a balanced budget increase in government spending, as a percentage of GDP, increases economic growth and reduces unemployment, perhaps at the cost of somewhat higher inflation. This paper argues that the standard analysis ignores the supply-side effects of increased taxation, and that the sign of the balanced budget multiplier is negative. A balanced increase in government expenditure and taxes as a percentage of GDP will therefore lead to stagflation. ‘Tax and spend’ will not work. An increase in the average tax rate, in and of itself, will cause inflation.

Suggested Citation

  • John Smithin, 2022. "What is the Sign of the Balanced Budget Multiplier?," Springer Books, in: Steven Pressman & John Smithin (ed.), Debates in Monetary Macroeconomics, chapter 0, pages 111-129, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-11240-9_6
    DOI: 10.1007/978-3-031-11240-9_6
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