Question

Explain what an economist might oppose fiscal consolidation in the short run. Why might fiscal consolidation look more attractive in the medium-run?

Answer 1

Fiscal consolidation refers to the process where initiatives are taken by the government to reduce debt and improve the fiscal deficit level in the economy. Economists oppose it in the short run, because it brings huge burden upon the economy in terms of austerity measures, reduction on budget for development programs, and increasing deductibles on people. It has the potential to create chaos in the society and people and investors can lose confidence in the government.

Though, in the medium run, the government can take step by step measures to reduce the debt level and manage the deficit. It is done by taking measures on a yearly basis and also taking important government institutions in the confidence. Due to these planned measures, debt level reduces, interest burden also comes down and economy also sustain the pressure that comes with the balanced budget approach. So, medium run is always an attractive time period to implement fiscal consolidation by the government.