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Fiscal Policy Effects on Economic Growth: Short Run vs Long Run

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  • Kalle Kukk

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    (Department of Economics, Tallinn University of Technology)

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    Abstract

    There are two important aspects to take into account while analysing fiscal policy effects on economic growth. First, it should be made clear whether Keynesian short-run or classical long-run effects are the object of interest. Second, the relations between different fiscal and macroeconomic variables should be identified – all possible simultaneous changes in other fiscal and macroeconomic indicators should be taken account of while analysing the effect of any fiscal policy decision on economic growth. As demonstrated in this article, Keynesian principles do not seem to hold as fiscal policy cannot have any remarkable impact on economy in a short run. But it is confirmed that in the long run, expansionary fiscal policies are not beneficial to the economy generally. For a government it is essential to recognise that changes in different revenue and expenditure categories may have the same impact on budget balance and on total government revenue and expenditure but they have different effects on economic growth in the long run. For example, fiscal policy decisions have different effects depending on whether to save increased revenue, to spend it for current expenditure or to use it for public investment.

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    File URL: http://deepthought.ttu.ee/majandus/tekstid/TUTWPE_07_167.pdf
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    Bibliographic Info

    Paper provided by Tallinn School of Economics and Business Administration, Tallinn University of Technology in its series Working Papers with number 167.

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    Length: 20
    Date of creation: 2007
    Date of revision:
    Publication status: Published in Working Papers in Economics.School of Economics and Business Administration,Tallinn University of Technology (TUTWPE), Pages 77-96
    Handle: RePEc:ttu:wpaper:167

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    Keywords: fiscal policy; economic growth; budget deficit; government revenue; government expenditure; taxes;

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