Specific Issues in Fiscal Policy

Abstract

The balanced budget multiplier theorem is one of the oldest and most widely known budgetary concepts which sprang directly from Keynesian economics. Since the early formulations of the doctrine in the 1940s [33, 97], it has been subject to considerable modification and qualification, but the underlying logic is unassailed and its importance to fiscal policy undiminished. Essentially, the theory argues that the effect upon the level of economic activity of an increase in expenditures upon goods and services, financed by an equal increase in taxation, will not be neutral. It follows that the level of the budget is itself a determinant of national income — a conclusion which questions the usefulness of the budget surplus as an index of fiscal policy, irrespective of whether it is evaluated at the full-employment income level.