Fiscal policy: how it can be used safely

March 29, 2016

Expansionary fiscal policy or stimulus is proffered by many populist politicians as the solution to our current economic situation.  Spend more money through the Government channel of the national income equation and boost the economy through more jobs, more public services and reduced unemployment.  However, we have seen this before especially in 2 periods, 1977-1981 and 2001-2008 and the purpose of this paper is to contribute to a discussion on the safe use of fiscal policy and remembering the lessons from previous periods of expansionary fiscal policy before we start increasing government spending.  The size of the multiplier effect is critical for the success of these policies and Ireland, in line with most small, open, trading economies, have small to negligible multiplier effects.  The current round of ‘austerity’ is the result of the last round of ‘stimulus’ and recognising that monetary policy has done as much as it probably can to stimulate the European economy and that more fiscal interventions are needed, it must be targeted and considered not broad stroked.  The paper goes on to suggest one fiscal-policy strategy to stimulate the European economy by working across the single market and targeted expenditure on those countries and regions with the highest macro- multiplier effects and on those items with the highest rates of return.   Thus, countries and regions with high multipliers get the benefit of increased stimulus which should boost total single-market growth and countries and regions with low multipliers get the private-sector growth effect without running up increased public expenditure where it generates the least economic benefit.

To read the full paper please click here


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