Fiscal Policy As A Tool Of Economic Stabilization—Comments To An Oecd Report

The paper discusses the use of fiscal policy as a tool of economic stabilization in seven OECD countries since the mid‐fifties. It draws on a recent empirical study, with attached fiscal policy recommendations, made by an expert group within the OECD, in which the author was a member. The method of analysis in the paper is to compare on one hand the ‘direct’ impact on aggregate demand of fiscal policy changes with on the other hand the timing of the business cycle. Among the countries included in the study, the U. K. and Sweden seem to have most systematically tried fiscal policy as an instrument of economic stabilization. It seems quite clear that the policy in the U. K. has been rather unsuccessful against the background of domestic economic conditions, whereas the experiences in Sweden are considerably more promising. In other countries fiscal policy has been used at particular occasions for economic stabilization, such as in Germany and Belgium during some periods with tendencies to recessions (1958 and 1962), in the U. S. to move the economy closer to full capacity utilization (1964‐65) and at several occasions in various countries as part of a policy package to avoid balance of payments crises. It does not seem that forecasting mistakes have been the main obstacle to a more efficient stabilization policy. Time lags in the decision‐making procedure, as well as lack of determination and firmness in policy, seem to have been more important obstacles. Another important complication has been conflicts of goals. Sometimes the policy has been more geared to the external than to the internal economic situation. At other times when the policy has been directed to influence the development of prices, unemployment problems have arisen, particularly as the price variable usually seems to lag the business cycle of the volume components. There has also been a tendency to let the expansionary actions during recessions last too long a time, thereby giving the next boom a ‘flying start’.