Government Debt as a Generator of Economic Growth

Abstract

1CONOMISTS are generally aware of the impact of fiscal policy on the income stream and have prescribed the appropriate fiscal measures for expanding or contracting the flow of income. They have also given attention to the expenditure-stabilizing effect of the net stock of privately-held salable assets, when levels of prices and income fluctuate. However, they have paid little attention to the role of fiscal policy as a generator or destroyer of such assets. A budgetary surplus or deficit always has an impact on the balance sheets of the private sector, in addition to its impact on the income-expenditure accounts. This discussion is devoted to the effect of fiscal policy on the asset items in private balance sheets and the implications of this for the generation of income. The first section attempts to show that the government debt is one of the variables determining household expenditure decisions. From this it is shown that fiscal deficits or surpluses have cumulative effects on national income which are not present for corresponding magnitudes of private expenditure. The second section considers how the public debt should behave in order to keep national income growing at the full-employment level. It shows not only that the public debt must continue to grow in order to maintain full employment, but that for many rates of real income growth it must grow at a faster rate than income itself, given the model here considered.