Discretionary Fiscal Policy and Budget Deficits: An 'Orthodox' Critique of Current Policy Debate

By Hart, Neil | The Economic and Labour Relations Review : ELRR, July 2009 | Go to article overview

Discretionary Fiscal Policy and Budget Deficits: An 'Orthodox' Critique of Current Policy Debate


Hart, Neil, The Economic and Labour Relations Review : ELRR


Introduction

A solid majority of economists is now of the opinion that, even in a capitalist system, full employment may be secured by a government spending programme, provided there is in existence adequate plant to employ all existing labour power and provided adequate supplies of necessary foreign raw materials may be obtained in exchange for exports (Kalecki 1943: 420).

Over the past few decades, discretionary fiscal policy of the form perceived by Kalecki has not been a central component of macroeconomic policy formulation. Instead, 'neutral' and 'responsible' fiscal policy has been widely advocated, taken to correspond to the achievement and maintenance of balanced or surplus budgets (across the cycle) and reductions in the stock of Government debt. This policy stance is, for example, asserted directly in the most recent Australian Government's Budget papers:

The Government's fiscal strategy aims to ensure fiscal sustainability over the medium term. The Government's medium-term fiscal strategy involves:

* achieving budget surpluses, on average, over the medium term;

* keeping taxation as a share of GDP on average below the level for 2007-08; and

* improving the Government's net financial worth over the medium term (Australian Commonwealth Government 2008: 1.4).

Similar principles are found in fiscal policy strategy statements in many other countries, perhaps most significantly in the EU fiscal policy framework enshrined in the Stability and Growth Pact and Article 104 of the EC (Maastricht) Treaty. Here, a rules-based fiscal policy was instituted in an attempt to ensure that member states avoid excessive government deficits. These policy rules were defined in terms of the achievement of deficit and debt-to-GDP ratios, with subsequent modifications allowing for 'temporary' departures from these guidelines under specific and verifiable circumstances. Within the EU framework, 'neutrality' of fiscal policy is emphasised, with European Central Bank (ECB)-implemented monetary policy, primarily targeting price stability, being the chosen instrument for discretionary macroeconomic policy actions. (1)

The 'neutral' and 'responsible' principles of 'sound' fiscal policy continue to be put forward in opposition to the calls for significant fiscal stimulus during the current global economic downturn. While expansionary monetary policy and central bank 'rescue packages' for financial institutions have met with fairly widespread approval, incumbent governments have struggled to convince their electorates that expansionary fiscal policy in the shape of budget deficits represents a 'responsible', and indeed essential, fiscal policy stance. In terms of the current debate within Australia, one can only suspect that when the fiscal budget goes into deficit, the (self-proclaimed 'fiscal conservative') Government will feel obliged to issue an 'apology' to its apprehensive electorate and face censure and derision from the opposition coalition parties who seek to equate budget deficits with 'fiscal negligence'.

The purpose of this article is not primarily to develop a critique of orthodox macroeconomic theory, although there are certainly compelling grounds upon which such a critique could be constructed. Instead, its major purpose is to counter some of the naive interpretations of orthodox theory that appear to have informed much of the current discussion of the role and effectiveness of fiscal policy. Firstly, it is argued that an active role for discretionary fiscal policy is not inconsistent with a considered interpretation of what may be construed to be mainstream economic analysis, both in terms of the traditional textbook models and the more recently formulated New Neoclassical Synthesis (NNS) approaches. Secondly, the idea that there is something inherently 'irresponsible' or 'profligate' with budget deficits is shown to rest on a rather antiquated view of public finance which fails to encompass the realities of endogenous money and interest rate targeting monetary policy. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Discretionary Fiscal Policy and Budget Deficits: An 'Orthodox' Critique of Current Policy Debate
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.