Deficit financing’ or ‘deficit-reduction financing ? : debates in contemporary economics : origins, confusions and clarity

Abstract EN

1710 The analysis of government deficits and public debt points to a fundamental error in contemporary economic discussions.

It is not possible to assess the stance of fiscal policy from estimates of the public sector deficit.

John Maynard Keynes’s macroeconomics and the empirical evidence discussed in this paper indicate that expansionary fiscal policy financed by loan issues will lead to growth in economic activity and employment.

In an economy with spare capacity and idle resources, high government expenditure generates income, including tax revenues and thereby reduces the government deficit, and cuts public debt.

The main purpose of increased loanfinanced government spending at times of private economic weakness is to increase the nation’s income.

Keynes argued that any such government spending was not deficit spending, because he understood the spending as the most sensible means to cut the deficit.

Deficit-reduction spending might be a more appropriate definition, because as he argued with Josiah Stamp : “You will never balance the budget through measures which reduce national income” (Keynes, 1978, vol.

21, p.

149).