Some economists worry that the size of recent and current budget deficits (and the rapidly accumulating...

Some economists worry that the size of recent and current budget deficits (and the rapidly accumulating public debt) could make countercyclical fiscal policy more difficult to use effectively in the future. What is their reasoning? Under what conditions would such an assertion be correct?

Expert Solution

A counter-cyclical fiscal policy refers to strategy by the government to counter boom or recession through fiscal measures. It works against the ongoing boom or recession trend; thus, trying to stabilize the economy. During a recession , the countercyclical fiscal policy is used to generate demand by fine-tuning taxation and expenditure policies. Reducing taxes and increasing expenditure will help to create demand and producing upswing in the economy. But this could prove difficult in the future since several governments are now already saddled with large amounts of public debt which makes it difficult for them to borrow even more during times of recession. It is nearly impossible for the governments today to pay off the entire amount that they have borrowed but modern monetarists argue that they will never actually have to do that and only have to pay the interest payments in order to service the debt. The problem is that even that could prove difficult since goverments may not have the fisczl leverage to take additonal debts during times of recession due to their interest obligations to exisitng debt.

Rahul Sunny answered 1 year ago

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