Government Budget and Fiscal Policy

In textbook-Keynesian theory, four features distinguish fiscal policy. First, government expenditures and revenues are independent of each other, and issues of how expenditures are financed or what happens to excess revenues are not addressed. A consideration of government budget constraint, however, shows that either the government has to tax the public or its expenditures have monetary implications. Second, the Keynesian model assumes that the public is passive regarding government debt. Higher debt, however, puts the burden of paying interest and repaying debt on the shoulders of the public, both present and future generations. What is the role of government debt and how does the public react to budget deficit? The Ricardian equivalence is one theory that takes the reaction of the public to future increases in taxes into account albeit it is based on extremely unlikely assumptions. Third, the Keynesian model concentrates on the effect of taxes on demand. However, high rates of taxation are disincentives to work and investment, and thus the supply effects of government budgets need to be considered. Finally, the Keynesian model considers government expenditures and taxes as neutral variables that can be manipulated at will. Budget and fiscal policy, however, are political processes and need to be studied as such. The modern field of political economy has a lot to offer to macroeconomic debates.

The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to individuals of a great nation, is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate.

The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.

Adam Smith, The Wealth of Nations

et seize et seize qu’est-ce qu’il font?

Ils ne font rien seize et seize

et surtout pas trente-deux

from “Page d’écriture,” by Jacques Prévert