Open Access Journal Article

Dilemma for fiscal policies: supporting economic activity, or ensuring public debt sustainability?

by Séverine Menguy a,* orcid
a
Faculté Société et Humanités, Université Paris Cité, Paris, France
*
Author to whom correspondence should be addressed.
JEA  2024, 62; 3(2), 62; https://doi.org/10.58567/jea03020010
Received: 11 July 2023 / Accepted: 15 August 2023 / Published Online: 15 June 2024
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Abstract

We study analytically the conflict of goals between stabilizing economic activity and public debt sustainability, for the fiscal authorities. In the short run, an active and expansionary fiscal policy, increasing public investment or reducing the labor taxation rate, is growth enhancing. However, as these short term fiscal policies also decrease government revenue and increase the public debt, budgetary and fiscal multipliers are reduced in the long run. In the framework of a potential ZLB constraint for monetary policy, an expansionary fiscal policy is thus appropriate only if long term labor and consumption taxation rates are small, and if the share of public expenditure in GDP is high. On the contrary, fiscal policy should be contractionary, in order to insure the sustainability of the long term public debt, if long term labor and consumption taxation rates are high. A contractionary fiscal policy is then also all the more appropriate as the sensitivity of government expenditure to the public debt is high, and as the labor share in the production function is high.

Keywords: Economic stabilization; Public debt sustainability; Public expenditure; Fiscal policy;
Copyright: © 2024 by Menguy. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) (Creative Commons Attribution 4.0 International License). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.

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ACS Style
Menguy, S. Dilemma for fiscal policies: supporting economic activity, or ensuring public debt sustainability?. Journal of Economic Analysis, 2024, 3, 62. https://doi.org/10.58567/jea03020010
AMA Style
Menguy S. Dilemma for fiscal policies: supporting economic activity, or ensuring public debt sustainability?. Journal of Economic Analysis; 2024, 3(2):62. https://doi.org/10.58567/jea03020010
Chicago/Turabian Style
Menguy, Séverine 2024. "Dilemma for fiscal policies: supporting economic activity, or ensuring public debt sustainability?" Journal of Economic Analysis 3, no.2:62. https://doi.org/10.58567/jea03020010
APA style
Menguy, S. (2024). Dilemma for fiscal policies: supporting economic activity, or ensuring public debt sustainability?. Journal of Economic Analysis, 3(2), 62. https://doi.org/10.58567/jea03020010

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