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Budget deficits, public debt and the level of public investment

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  • Malcom SAWYER

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Abstract

This paper begins by briefly identifying the two traditions in macroeconomic analysis with regard to budget deficits, that of ‘fiscal consolidation and Ricardian equivalence’ and the ‘functional finance’ approach. The paper argues for the deficits/debt position to be approached in terms of ‘functional finance’, which sets the budget position to be compatible with the highest achievable and sustainable level of economic activity, to an alternative ‘rule’ for budget deficits to those such as ‘balanced budget over the cycle’. The paper points to the focus on the size of the public debt, and argues that the government’s capital account balance sheet should be viewed in terms of assets and liabilities and not liabilities alone. The paper also argues that there is no merit in the adoption of a ‘golden rule’.

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File URL: http://wp.demm.unimi.it/tl_files/wp/2009/DEMM-2009_031wp.pdf
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Bibliographic Info

Paper provided by Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano in its series Departmental Working Papers with number 2009-31.

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Date of creation: 03 Nov 2009
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Handle: RePEc:mil:wpdepa:2009-31

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Related research

Keywords: Functional finance; fiscal consolidation; budget deficits; public sector balance sheet; public debt;

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