Fiscal Reforms That Work

Budget deficits have soared in the industrial countries over the past 20 years, and most countries are faced with the challenge of bringing them back to earth. This is not easy. Electorates seem unwilling to pay more taxes, and according to traditional Keynesian theory, reducing government expenditu...

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Bibliographic Details
Published in:Policy File 1996
Main Authors: McDermott, C John, Wescott, Robert F
Format: Report
Language:English
Subjects:
Budgets/Expenditures
Economic policy
Government
International Monetary Fund
Online Access:Request full text
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Summary:Budget deficits have soared in the industrial countries over the past 20 years, and most countries are faced with the challenge of bringing them back to earth. This is not easy. Electorates seem unwilling to pay more taxes, and according to traditional Keynesian theory, reducing government expenditures can lead to recession. This paper presents a solution to the dilemma through the use of a neoclassical model: reducing expenditures does not necessarily lead to reduced economic activity. It could signal lower future tax burdens and encourage investment, leading to a resurgence in economic output.