What is the Sign of the Balanced Budget Multiplier?

John Smithin ()
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John Smithin: York University

Chapter Chapter 6 in Debates in Monetary Macroeconomics, 2022, pp 111-129 from Springer

Abstract: Abstract The conventional view in economics contends that the sign of the balanced budget multiplier is positive – a balanced budget increase in government spending, as a percentage of GDP, increases economic growth and reduces unemployment, perhaps at the cost of somewhat higher inflation. This paper argues that the standard analysis ignores the supply-side effects of increased taxation, and that the sign of the balanced budget multiplier is negative. A balanced increase in government expenditure and taxes as a percentage of GDP will therefore lead to stagflation. ‘Tax and spend’ will not work. An increase in the average tax rate, in and of itself, will cause inflation.

Keywords: Average tax rate; Balanced budget multiplier; Government spending; Inflation; Supply-side effect of taxation; Tax and spend (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-11240-9_6

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DOI: 10.1007/978-3-031-11240-9_6

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