Public Expenditure in an Inflationary World
During the period of high inflation, public expenditure in the advanced industrial nations rose both absolutely and as a proportion of national income. It was hardly surprising that many analysts postulated a direct causal link between rising public expenditure and inflation. The aim of this chapter is less to resolve that causal link than to explore the extent to which both are explained by the same underlying societal pressures.
If there is any link between levels of public expenditure and rates of inflation, it is by no means a simple or mechanical one; when governments step on the accelerator of public expenditure, the engine of inflation does not automatically rev up. Several statistical studies have found no relation between levels of public expenditure and rates of inflation in member countries of the Organization for Economic Cooperation and Development (OECD).1 David Cameron, in chapter 9, below, concludes that public expenditure cannot usefully be posited as a necessary or sufficient explanation of inflation. This is not to argue that public expenditure can never be a cause of inflation. In certain, specific circumstances the methods of financing public expenditure, whether stable or rising, can contribute to inflation--for example, if government taxation is met out of savings rather than consumption or if government borrowing drives up interest rates.2____________________