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Determination of National Income and the Role of
Fiscal Policy
Determination of National Income and the Role of
Fiscal Policy
Equilibrium Level of National IncomeEquilibrium Level of National Income
• The circular flow of income• The circular flow of income
A simplified circular flow of income modelA simplified circular flow of income model
Cd
A simplified circular flow of income modelA simplified circular flow of income model
CdIncomes
A simplified circular flow of income modelA simplified circular flow of income model
Cd
W = S + T + M
Incomes
A simplified circular flow of income modelA simplified circular flow of income model
Cd
W = S + T + M
J = I + G + X
Incomes
A simplified circular flow of income modelA simplified circular flow of income model
• Effect on national income of a change in injections and/or withdrawals
– J > W : national income rises
– W > J : national income falls
• The Keynesian diagram: the withdrawals and injections approach
– the withdrawals curve
• Effect on national income of a change in injections and/or withdrawals
– J > W : national income rises
– W > J : national income falls
• The Keynesian diagram: the withdrawals and injections approach
– the withdrawals curve
Equilibrium Level of National IncomeEquilibrium Level of National Income
OY
W
Cd, W, JDeriving equilibrium national incomeDeriving equilibrium national income
• Effect on national income of a change in injections and/or withdrawals– J > W : national income rises
– W > J : national income falls
• The Keynesian diagram: the withdrawals and injections approach– the withdrawals curve
– the injections curve
• Effect on national income of a change in injections and/or withdrawals– J > W : national income rises
– W > J : national income falls
• The Keynesian diagram: the withdrawals and injections approach– the withdrawals curve
– the injections curve
Equilibrium Level of National IncomeEquilibrium Level of National Income
OY
W
Cd, W, J
J
Deriving equilibrium national incomeDeriving equilibrium national income
• Effect on national income of a change in injections and/or withdrawals– J > W : national income rises
– W > J : national income falls
• The Keynesian diagram: the withdrawals and injections approach– the withdrawals curve
– the injections curve
– equilibrium
• Effect on national income of a change in injections and/or withdrawals– J > W : national income rises
– W > J : national income falls
• The Keynesian diagram: the withdrawals and injections approach– the withdrawals curve
– the injections curve
– equilibrium
Equilibrium Level of National IncomeEquilibrium Level of National Income
OY
W
Cd, W, J
J
Y1
b
a
Deriving equilibrium national incomeDeriving equilibrium national income
OY
W
Cd, W, J
J
Y2
d
c
Deriving equilibrium national incomeDeriving equilibrium national income
OY
W
Cd, W, J
J
Ye
x
Deriving equilibrium national incomeDeriving equilibrium national income
• The Keynesian diagram: the income and expenditure approach– the 45° line
• The Keynesian diagram: the income and expenditure approach– the 45° line
Equilibrium Level of National IncomeEquilibrium Level of National Income
OY
Y = Cd + W
W
Cd, W, J
J
Deriving equilibrium national incomeDeriving equilibrium national income
• The Keynesian diagram: the income and expenditure approach– the 45° line
– the expenditure curve
• The Keynesian diagram: the income and expenditure approach– the 45° line
– the expenditure curve
Equilibrium Level of National IncomeEquilibrium Level of National Income
OY
W
Cd, W, J
J
Cd
Y = Cd + WE = Cd + J
J
Deriving equilibrium national incomeDeriving equilibrium national income
• The Keynesian diagram: the income and expenditure approach– the 45° line
– the expenditure curve
– equilibrium
• The Keynesian diagram: the income and expenditure approach– the 45° line
– the expenditure curve
– equilibrium
Equilibrium Level of National IncomeEquilibrium Level of National Income
OY
W
Cd, W, J
J
Cd
Y = Cd + WE = Cd + J
Y1
f
e
Deriving equilibrium national incomeDeriving equilibrium national income
OY
W
Cd, W, J
J
Cd
Y = Cd + WE = Cd + J
Y2
h
g
Deriving equilibrium national incomeDeriving equilibrium national income
OY
W
Cd, W, J
J
Cd
Y = Cd + WE = Cd + J
Ye
x
z
Deriving equilibrium national incomeDeriving equilibrium national income
The MultiplierThe Multiplier
• The multiplier: introduction
– the circular flow of income and effects of changes in injections
– definition of the multiplier: ΔY/ΔJ
• The withdrawals and injections approach
– graphical analysis: shift in the J line
• The multiplier: introduction
– the circular flow of income and effects of changes in injections
– definition of the multiplier: ΔY/ΔJ
• The withdrawals and injections approach
– graphical analysis: shift in the J line
The multiplier: (a) a shift in injectionsThe multiplier: (a) a shift in injections
OY
W
W, J
J1
Ye1
a
OY
W
J1
J2
Ye1
a
Ye2
b
W, JThe multiplier: (a) a shift in injectionsThe multiplier: (a) a shift in injections
OY
W
J1
J2
Ye1
a
Ye2
b
Y
c
WJJ1
J2
Multiplier = Y / J
= Y / W= ca / bc
W, JThe multiplier: (a) a shift in injectionsThe multiplier: (a) a shift in injections
The MultiplierThe Multiplier
• The multiplier: introduction– the circular flow of income and effects of
changes in injections
– definition of the multiplier: ΔY/ΔJ
• The withdrawals and injections approach– graphical analysis: shift in the J line
– the formula : 1/mpw
– or : 1/(1–mpcd)
• The multiplier: introduction– the circular flow of income and effects of
changes in injections
– definition of the multiplier: ΔY/ΔJ
• The withdrawals and injections approach– graphical analysis: shift in the J line
– the formula : 1/mpw
– or : 1/(1–mpcd)
OY
W
J1
J2
Ye1
a
Ye2
b
Y
c
WJJ1
J2
Multiplier = Y / J= Y / W= ca / bc
= 1/mpw
W, JThe multiplier: (a) a shift in injectionsThe multiplier: (a) a shift in injections
The MultiplierThe Multiplier
• The multiplier: introduction– the circular flow of income and effects of
changes in injections
– definition of the multiplier: ΔY/ΔJ
• The withdrawals and injections approach– graphical analysis: shift in the J line
– the formula : 1/mpw
– or : 1/(1–mpcd)
– graphical analysis: shift in the W line
• The multiplier: introduction– the circular flow of income and effects of
changes in injections
– definition of the multiplier: ΔY/ΔJ
• The withdrawals and injections approach– graphical analysis: shift in the J line
– the formula : 1/mpw
– or : 1/(1–mpcd)
– graphical analysis: shift in the W line
The multiplier: (b) a shift in withdrawalsThe multiplier: (b) a shift in withdrawals
OY
W1
J
Ye1
a
W, J
OY
W1
J
Ye1
a
W, J
W2
Ye2
c
The multiplier: (b) a shift in withdrawalsThe multiplier: (b) a shift in withdrawals
OY
W1
J
Ye1
a
W, J
W2
Ye2
c
Y
W b
Multiplier = Y / W= ca / ab
The multiplier: (b) a shift in withdrawalsThe multiplier: (b) a shift in withdrawals
The MultiplierThe Multiplier
• The multiplier: introduction– the circular flow of income and effects of
changes in injections– definition of the multiplier: ΔY/ΔJ
• The withdrawals and injections approach– graphical analysis: shift in the J line– the formula : 1/mpw– or : 1/(1–mpcd)– graphical analysis: shift in the W line
• The income and expenditure approach
• The multiplier: introduction– the circular flow of income and effects of
changes in injections– definition of the multiplier: ΔY/ΔJ
• The withdrawals and injections approach– graphical analysis: shift in the J line– the formula : 1/mpw– or : 1/(1–mpcd)– graphical analysis: shift in the W line
• The income and expenditure approach
The MultiplierThe Multiplier
• The multiplier: introduction– the circular flow of income and effects of
changes in injections– definition of the multiplier: ΔY/ΔJ
• The withdrawals and injections approach– graphical analysis: shift in the J line– the formula : 1/mpw– or : 1/(1–mpcd)– graphical analysis: shift in the W line
• The income and expenditure approach– graphical analysis: shift in the E line
• The multiplier: introduction– the circular flow of income and effects of
changes in injections– definition of the multiplier: ΔY/ΔJ
• The withdrawals and injections approach– graphical analysis: shift in the J line– the formula : 1/mpw– or : 1/(1–mpcd)– graphical analysis: shift in the W line
• The income and expenditure approach– graphical analysis: shift in the E line
The multiplier: (c) a shift in the expenditure curveThe multiplier: (c) a shift in the expenditure curve
OY
E, W, J
Y
E1
Ye1
OY
Y
E1
Ye1
E2
Ye2
E, W, JThe multiplier: (c) a shift in the expenditure curveThe multiplier: (c) a shift in the expenditure curve
OY
Y
E1
Ye1
E2
Ye2
Multiplier = Y / J= ca / ba
a
c
Y
J
E, W, J
b
The multiplier: (c) a shift in the expenditure curveThe multiplier: (c) a shift in the expenditure curve
• 'Full-employment' national income
• 'Gap' analysis– the deflationary gap
• 'Full-employment' national income
• 'Gap' analysis– the deflationary gap
Keynesian Analysis of Unemployment and InflationKeynesian Analysis of Unemployment and Inflation
OY
W
W, J
J
Ye
The deflationary gapThe deflationary gap
OY
W
W, J
J
YeYF
Deflationary gap
c
d
The deflationary gapThe deflationary gap
OY
W, J, E
YeYF
Y
E
The deflationary gapThe deflationary gap
OYYe
YF
Y
Ea
b
Deflationary gap
W, J, EThe deflationary gapThe deflationary gap
OY
W
J
YeYF
c
d
Y
Ea
b
Deflationary gap
W, J, EThe deflationary gapThe deflationary gap
• 'Full-employment' national income
• 'Gap' analysis– the deflationary gap
– the inflationary gap
• 'Full-employment' national income
• 'Gap' analysis– the deflationary gap
– the inflationary gap
Keynesian Analysis of Unemployment and InflationKeynesian Analysis of Unemployment and Inflation
OY
W
W, J
Ye
J
The inflationary gapThe inflationary gap
OY
W
W, J
YeYF
J
The inflationary gapThe inflationary gap
OY
W
W, J
YeYF
Inflationary gap
Jg
h
The inflationary gapThe inflationary gap
OY
YE
W, J, E
Ye
The inflationary gapThe inflationary gap
OY
YE
W, J, E
Ye
The inflationary gapThe inflationary gap
OYYF
YE
Inflationary gap
W, J, E
e
f
Ye
The inflationary gapThe inflationary gap
OYYe
YF
YE
Inflationary gap
e
f
W
Jg
h
W, J, EThe inflationary gapThe inflationary gap
• 'Full-employment' national income
• 'Gap' analysis– the deflationary gap
– the inflationary gap
– policy implications
• 'Full-employment' national income
• 'Gap' analysis– the deflationary gap
– the inflationary gap
– policy implications
Keynesian Analysis of Unemployment and InflationKeynesian Analysis of Unemployment and Inflation
• 'Full-employment' national income
• 'Gap' analysis– the deflationary gap
– the inflationary gap
– policy implications
• Inflation and unemployment together
• 'Full-employment' national income
• 'Gap' analysis– the deflationary gap
– the inflationary gap
– policy implications
• Inflation and unemployment together
Keynesian Analysis of Unemployment and InflationKeynesian Analysis of Unemployment and Inflation
• 'Full-employment' national income
• 'Gap' analysis– the deflationary gap
– the inflationary gap
– policy implications
• Inflation and unemployment together– inflationary pressures before the full-
employment level of income
• 'Full-employment' national income
• 'Gap' analysis– the deflationary gap
– the inflationary gap
– policy implications
• Inflation and unemployment together– inflationary pressures before the full-
employment level of income
Keynesian Analysis of Unemployment and InflationKeynesian Analysis of Unemployment and Inflation
• 'Full-employment' national income
• 'Gap' analysis– the deflationary gap
– the inflationary gap
– policy implications
• Inflation and unemployment together– inflationary pressures before the full-
employment level of income
– implications for shape of AS curve
• 'Full-employment' national income
• 'Gap' analysis– the deflationary gap
– the inflationary gap
– policy implications
• Inflation and unemployment together– inflationary pressures before the full-
employment level of income
– implications for shape of AS curve
Keynesian Analysis of Unemployment and InflationKeynesian Analysis of Unemployment and Inflation
OY
Pri
ce le
vel
YF
AS1
Unemployment and inflationUnemployment and inflation
OY
AS1
Pri
ce le
vel
YF
AS2
Unemployment and inflationUnemployment and inflation
• 'Full-employment' national income
• 'Gap' analysis– the deflationary gap
– the inflationary gap
– policy implications
• Inflation and unemployment together– inflationary pressures before the full-
employment level of income
– implications for shape of AS curve
– effect of an increase in aggregate demand
• 'Full-employment' national income
• 'Gap' analysis– the deflationary gap
– the inflationary gap
– policy implications
• Inflation and unemployment together– inflationary pressures before the full-
employment level of income
– implications for shape of AS curve
– effect of an increase in aggregate demand
Keynesian Analysis of Unemployment and InflationKeynesian Analysis of Unemployment and Inflation
O
Pric
e le
vel
National output
YP
The effects of increases in aggregate demandon national output
The effects of increases in aggregate demandon national output
AS
O Y1
Pric
e le
vel
National output
Y2
AS
Y3 Y4 YP
AD3AD2AD1
AD4
The effects of increases in aggregate demandon national output
The effects of increases in aggregate demandon national output
• The Phillips curve– the shape of the curve
• The Phillips curve– the shape of the curve
Keynesian Analysis of Unemployment and InflationKeynesian Analysis of Unemployment and Inflation
0
1
2
3
4
5
6
7
8
9
0 1 2 3 4 5 6
The original Phillips curveThe original Phillips curve
Unemployment (%)
Wa
ge in
flatio
n (
%)
• The Phillips curve
– the shape of the curve
– the position of the curve
• The Phillips curve
– the shape of the curve
– the position of the curve
Keynesian Analysis of Unemployment and InflationKeynesian Analysis of Unemployment and Inflation
0
1
2
3
4
5
6
7
8
9
0 1 2 3 4 5 6
The original Phillips curveThe original Phillips curve
Unemployment (%)
Wa
ge in
flatio
n (
%)
• The Phillips curve
– the shape of the curve
– the position of the curve
– policy implications of the curve
• The Phillips curve
– the shape of the curve
– the position of the curve
– policy implications of the curve
Keynesian Analysis of Unemployment and InflationKeynesian Analysis of Unemployment and Inflation
• The Phillips curve
– the shape of the curve
– the position of the curve
– policy implications of the curve
– the breakdown of the curve
• The Phillips curve
– the shape of the curve
– the position of the curve
– policy implications of the curve
– the breakdown of the curve
Keynesian Analysis of Unemployment and InflationKeynesian Analysis of Unemployment and Inflation
• The Phillips curve
– the shape of the curve
– the position of the curve
– policy implications of the curve
– the breakdown of the curve
– recent relationship between inflation and unemployment
• The Phillips curve
– the shape of the curve
– the position of the curve
– policy implications of the curve
– the breakdown of the curve
– recent relationship between inflation and unemployment
Keynesian Analysis of Unemployment and InflationKeynesian Analysis of Unemployment and Inflation
Inflation (%)
Unemployment (%)
The breakdown of the Phillips curve?The breakdown of the Phillips curve?
6763
6265
6664
60
61
0
2
4
6
8
10
12
14
16
18
20
22
24
26
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Inflation (%)
Unemployment (%)
The breakdown of the Phillips curve?The breakdown of the Phillips curve?
6763
6265
6664
60
61
0
2
4
6
8
10
12
14
16
18
20
22
24
26
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Original Phillips curve
74
7173
7072
Inflation (%)
Unemployment (%)
The breakdown of the Phillips curve?The breakdown of the Phillips curve?
6968
6763
6265
6664
60
61
0
2
4
6
8
10
12
14
16
18
20
22
24
26
0 1 2 3 4 5 6 7 8 9 10 11 12 13
75
74
76
77
79
7173
7072
78
Inflation (%)
Unemployment (%)
The breakdown of the Phillips curve?The breakdown of the Phillips curve?
6968
6763
6265
6664
60
61
0
2
4
6
8
10
12
14
16
18
20
22
24
26
0 1 2 3 4 5 6 7 8 9 10 11 12 13
0
2
4
6
8
10
12
14
16
18
20
22
24
26
0 1 2 3 4 5 6 7 8 9 10 11 12 13
75
74
8076
77
79
7173
7072
78 82
8384
85
81
Inflation (%)
Unemployment (%)
The breakdown of the Phillips curve?The breakdown of the Phillips curve?
6968
6763
6265
6664
60
61
75
74
8076
77
79
7173
7072
78
90
89
9188
95
82
8384
85
86
93
8792
94
81
Inflation (%)
Unemployment (%)
The breakdown of the Phillips curve?The breakdown of the Phillips curve?
6968
6763
6265
6664
60
61
0
2
4
6
8
10
12
14
16
18
20
22
24
26
0 1 2 3 4 5 6 7 8 9 10 11 12 13
0
2
4
6
8
10
12
14
16
18
20
22
24
26
0 1 2 3 4 5 6 7 8 9 10 11 12 13
75
74
8076
77
79
7173
7072
78
90
89
9796
9188
95
82
8384
85
86
93
8792
94
81
Inflation (%)
Unemployment (%)
The breakdown of the Phillips curve?The breakdown of the Phillips curve?
6968
6763
6265
6664
60
6199
9800
01
03
02
Keynesian Analysis of the Business CycleKeynesian Analysis of the Business Cycle
• The accelerator
– changes in national income and induced investment
– the accelerator effect
• The accelerator
– changes in national income and induced investment
– the accelerator effect
The accelerator effectThe accelerator effect
The accelerator effectThe accelerator effect
The accelerator effectThe accelerator effect
The accelerator effectThe accelerator effect
The accelerator effectThe accelerator effect
• The accelerator
– changes in national income and induced investment
– the accelerator effect
– the instability of investment
• The accelerator
– changes in national income and induced investment
– the accelerator effect
– the instability of investment
Keynesian Analysis of the Business CycleKeynesian Analysis of the Business Cycle
-10
-8
-6
-4
-2
0
2
4
6
8
10
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
%(a) EU-15 Growth in GDP and business Investment(a) EU-15 Growth in GDP and business Investment
GDP growth (%)
-10
-8
-6
-4
-2
0
2
4
6
8
10
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
%(a) EU-15 Growth in GDP and business Investment(a) EU-15 Growth in GDP and business Investment
GDP growth (%)
Business investment(% change)
(b) EU-15 Industry confidence indicator
-30
-25
-20
-15
-10
-5
0
5
10
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
• The accelerator
– changes in national income and induced investment
– the accelerator effect
– the instability of investment
• The multiplier/accelerator interaction
• The accelerator
– changes in national income and induced investment
– the accelerator effect
– the instability of investment
• The multiplier/accelerator interaction
Keynesian Analysis of the Business CycleKeynesian Analysis of the Business Cycle
• The accelerator
– changes in national income and induced investment
– the accelerator effect
– the instability of investment
• The multiplier/accelerator interaction
• Fluctuations in stocks
• The accelerator
– changes in national income and induced investment
– the accelerator effect
– the instability of investment
• The multiplier/accelerator interaction
• Fluctuations in stocks
Keynesian Analysis of the Business CycleKeynesian Analysis of the Business Cycle
• Determinants of the course of the business cycle– why do booms and recessions persist?
• time lags
• 'bandwagon' effects
– why do booms and recessions end?• ceilings and floors
• echo effects
• the accelerator
• random shocks
• changes in government policy
• Determinants of the course of the business cycle– why do booms and recessions persist?
• time lags
• 'bandwagon' effects
– why do booms and recessions end?• ceilings and floors
• echo effects
• the accelerator
• random shocks
• changes in government policy
Keynesian Analysis of the Business CycleKeynesian Analysis of the Business Cycle
The Role of Fiscal PolicyThe Role of Fiscal Policy
• The purpose of fiscal policy
– correcting a fundamental disequilibrium
– fine tuning
• Deficits and surpluses
– central government deficits and surpluses
– public-sector deficits and surpluses
– the PSNCR
– the national debt
• The purpose of fiscal policy
– correcting a fundamental disequilibrium
– fine tuning
• Deficits and surpluses
– central government deficits and surpluses
– public-sector deficits and surpluses
– the PSNCR
– the national debt
UK public-sector borrowingUK public-sector borrowing
Source: www.statistics.gov.uk (National Statistics): Series RURQ and YBHA
UK public-sector borrowingUK public-sector borrowing
Source: www.statistics.gov.uk (National Statistics): Series RURQ and YBHA
UK public-sector borrowingUK public-sector borrowing
Source: www.statistics.gov.uk (National Statistics): Series RURQ and YBHA
UK public-sector borrowingUK public-sector borrowing
Source: www.statistics.gov.uk (National Statistics): Series RURQ and YBHA
General government deficits/surplusesand debt as % of GDP
General government deficits/surplusesand debt as % of GDP
General government deficits/surplusesand debt as % of GDP
General government deficits/surplusesand debt as % of GDP
The Role of Fiscal PolicyThe Role of Fiscal Policy
• The use of fiscal policy
– automatic fiscal stabilisers
– discretionary fiscal policy
• The use of fiscal policy
– automatic fiscal stabilisers
– discretionary fiscal policy
Effectiveness of Fiscal PolicyEffectiveness of Fiscal Policy
• Factors determining the effectiveness of fiscal policy
– accuracy of forecasting
– effect on J and W
– effect of changes in J and W on national income
– timing of the effects
– effects on the various macro objectives
• Factors determining the effectiveness of fiscal policy
– accuracy of forecasting
– effect on J and W
– effect of changes in J and W on national income
– timing of the effects
– effects on the various macro objectives
Effectiveness of Fiscal PolicyEffectiveness of Fiscal Policy
• Discretionary policy– problems of forecasting the magnitude of
the effects• effects of changes in government expenditure
• crowding out
• effects of changes in taxes
• size of the multiplier and accelerator effects
• random shocks
– problems of timing and time lags• various time lags
• policy may be destabilising
• Discretionary policy– problems of forecasting the magnitude of
the effects• effects of changes in government expenditure
• crowding out
• effects of changes in taxes
• size of the multiplier and accelerator effects
• random shocks
– problems of timing and time lags• various time lags
• policy may be destabilising
Fiscal policy: stabilising or destabilising?Fiscal policy: stabilising or destabilising?
O
Rea
l nat
iona
l inc
ome
Time
1
2
3
4
1
2
3
4
Path (a): no intervention
O
Rea
l nat
iona
l inc
ome
Time
1
2
3
4
1
2
3
4
Path (a): no intervention
Path (b): policy stabilises
Fiscal policy: stabilising or destabilising?Fiscal policy: stabilising or destabilising?
O
Rea
l nat
iona
l inc
ome
Time
1
2
3
4
1
2
3
4
Path (a): no intervention
Path (c): policy destabilisesPath (b): policy stabilises
Fiscal policy: stabilising or destabilising?Fiscal policy: stabilising or destabilising?
Effectiveness of Fiscal PolicyEffectiveness of Fiscal Policy
• Side-effects of discretionary policy
– cost inflation
– welfare and distributive justice
– incentives
• A rules-based approach to fiscal policy
– a 'steady-as-you-go' policy
– the EU Stability and Growth Pact
• Side-effects of discretionary policy
– cost inflation
– welfare and distributive justice
– incentives
• A rules-based approach to fiscal policy
– a 'steady-as-you-go' policy
– the EU Stability and Growth Pact
Getting budget deficits downGetting budget deficits down
-3
-1
1
3
5
7
9
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001Bud
get d
efic
its a
s a
% o
f GD
P
Getting budget deficits downGetting budget deficits down
France
-3
-1
1
3
5
7
9
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001Bud
get d
efic
its a
s a
% o
f GD
P
Getting budget deficits downGetting budget deficits down
FranceGermany
-3
-1
1
3
5
7
9
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001Bud
get d
efic
its a
s a
% o
f GD
P
Getting budget deficits downGetting budget deficits down
FranceGermany
Italy
-3
-1
1
3
5
7
9
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001Bud
get d
efic
its a
s a
% o
f GD
P
Getting budget deficits downGetting budget deficits down
Spain
FranceGermany
Italy
-3
-1
1
3
5
7
9
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001Bud
get d
efic
its a
s a
% o
f GD
P
Getting budget deficits downGetting budget deficits down
Spain
FranceGermany
Italy
Belgium
-3
-1
1
3
5
7
9
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001Bud
get d
efic
its a
s a
% o
f GD
P
Getting budget deficits downGetting budget deficits down
Spain
FranceGermany
Italy
Netherlands
Belgium
-3
-1
1
3
5
7
9
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001Bud
get d
efic
its a
s a
% o
f GD
P
Effectiveness of Fiscal PolicyEffectiveness of Fiscal Policy
• Side-effects of discretionary policy
– cost inflation
– welfare and distributive justice
– incentives
• A rules-based approach to fiscal policy
– a 'steady-as-you-go' policy
– the EU Stability and Growth Pact
– UK Labour government's 'Golden Rule'
• Side-effects of discretionary policy
– cost inflation
– welfare and distributive justice
– incentives
• A rules-based approach to fiscal policy
– a 'steady-as-you-go' policy
– the EU Stability and Growth Pact
– UK Labour government's 'Golden Rule'
Recommended