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Budget Policy in an Age of Reduced Expectations

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  • Markus Marterbauer

    (WIFO)

Abstract

The concept of debit and credit balances implies that the state's financing deficit can be reduced only when the business sector and the foreign sector at the same time assume more debts or when private households reduce their surplus. This working paper investigates how economic policy can influence such adjustments in an "age of reduced expectations" and low GDP growth rates. Considering the low capacity utilisation there is little likelihood of a debt-financed upswing of private investment. Greater demand from abroad, which could give rise to an export-oriented strategy of consolidation, could be seriously dampened by the simultaneous budget consolidation efforts in all EU countries. During the crisis savings rose as a proportion of the disposable incomes of private households, and there are several strategies to cut this rate again: 1. A credit-financed housing price bubble was used by several countries in recent years, but was found to be a macroeconomic disaster. 2. In a period of weak economic growth, high unemployment and thus precautionary saving can be effectively reduced by an increase of the employment elasticity of growth and a reduction of actual working hours. 3. Another promising approach is to improve incentives for the top income groups to increase their investment spending and cut down on their savings. 4. Redistributing assets and incomes leads to a dip in the average propensity to save and an increase of the demand for consumption among private households.

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Bibliographic Info

Paper provided by WIFO in its series WIFO Working Papers with number 366.

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Length: 28 pages
Date of creation: 31 Mar 2010
Date of revision:
Handle: RePEc:wfo:wpaper:y:2010:i:366

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  1. Pietro Catte & Nathalie Girouard & Robert Price & Christophe André, 2004. "Housing Markets, Wealth and the Business Cycle," OECD Economics Department Working Papers 394, OECD Publishing.
  2. Case, Karl E. & Quigley, John M. & Shiller, Robert J., 2012. "Comparing Wealth Effects: The Stock Market versus The Housing Market," Department of Economics, Working Paper Series qt6px1d1sc, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Reinhart, Carmen & Rogoff, Kenneth, 2009. "The Aftermath of Financial Crises," CEPR Discussion Papers 7209, C.E.P.R. Discussion Papers.
  4. Alexander Ludwig & Torsten Sløk, 2002. "The Impact of Changes in Stock Prices and House Prices on Consumption in OECD Countries," IMF Working Papers 02/1, International Monetary Fund.
  5. Ulrike Stein, 2009. "Zur Entwicklung der Sparquoten der privaten Haushalte - eine Auswertung von Haushaltsdaten des SOEP," IMK Working Paper 10-2009, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  6. Alberto Alesina & Roberto Perotti & José Tavares, 1998. "The Political Economy of Fiscal Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 197-266.
  7. Gunther Tichy, 2009. "Einige unkonventionelle Gedanken zum Leben nach der Krise," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 35(4), pages 501.
  8. Alberto Alesina & Silvia Ardagna, 2010. "Large Changes in Fiscal Policy: Taxes versus Spending," NBER Chapters, in: Tax Policy and the Economy, Volume 24, pages 35-68 National Bureau of Economic Research, Inc.
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