Faulting Internationally Coordinated Fiscal Stimulus

Abstract

Fiscal policy has been actively deployed globally by G20 governments to counter the impact of the global financial crisis on the real sectors of their economies. This coordinated fiscal response has involved a mix of new public expenditure, including on infrastructure, tax relief and increased income transfers to favoured groups. In the end, the case for fiscal stimulus rests on the presumption that it works in theory, along lines first proposed by Keynes. Yet, Keynesian fiscal activism founded on this presumption is contestable on numerous theoretical and practical grounds. This paper addresses key concerns about the consequences of using fiscal stimulus. It proposes that discretionary fiscal measures that have increased budget deficits and public indebtedness for economies worldwide entail significant macroeconomic costs and risks, and that, as a corollary, reducing unproductive public spending can be expansionary.