Working Paper: CEPR ID: DP84
Authors: Neil Rankin
Abstract: The microeconomic foundations provided by the 'disequilibrium' macro-modelling approach of Barro-Grossman-Malinvaud are used to compare the performance of government spending and taxation as instruments of fiscal demand management in achieving a welfare optimum. Spending is successively treated as 'waste', 'consumption' and 'investment'. In all cases, when bond-financed deficits are permitted, spending should be set with regard only to the full employment situation, leaving taxation as the instrument for maintaining full employment. Only when a balanced-budget constraint is imposed are there grounds for spending to be set above this level. This may occur when (a) an investment 'accelerator' exists, (b) there is utility of leisure, and (c) spending provides utility.
Keywords: Fiscal policy; Demand management; Disequilibrium; Welfare; Taxation versus spending
JEL Codes: 130; 320
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax cuts (H29) | Aggregate demand (E00) |
| Tax cuts (H29) | Employment (J68) |
| Tax cuts (H29) | Output (Y10) |
| Government spending (H59) | Full employment levels (J23) |
| Taxation (H20) | Maintain full employment levels (E24) |
| Government spending (under balanced-budget constraint) (H61) | Justified in specific scenarios (Z00) |
| Investment accelerator effect (E22) | Government spending justification (H56) |
| Utility from leisure (L90) | Government spending justification (H56) |
| Valued government spending (H56) | Government spending justification (H56) |