Sustainable Level Debt, Expansionary Austerity, and Fiscal Consolidation Theories: A Critical Analysis

Abstract

This commentary critically analyzes the debate between ‘deficit financing’ and ‘deficit-reduction financing’ in contemporary economics. Reading through the paper by Ann Pettifor (2019), one gets the impression that deficits don’t matter and that fiscal consolidation has not improved the public finances, at least for the advanced economies. Although Pettifor manages to pinpoint some of the fundamental errors in contemporary economic discussions on deficit financing, her paper puts undue emphasis on Keynes’s approach to public spending. Keynes’s argument was that increases in government spending will improve growth by boosting purchasing power into the economy. However, she fails to notice the basic problem with debt, that it keeps countries from investing in future growth. A more fundamental question to this debate should be to address the issues surrounding the sustainability of debt and the most effective means to reduce debt to sustainable levels. Therefore, fiscal restraint should be taken as an opportunity to make an economic virtue out of fiscal necessity, not to be politicized by politicians and policymakers to increase unnecessary and wasteful government spending that would expose countries to a higher degree of economic vulnerability.