Question

Do you find the traditional or the Ricardian view of government debt more credible? Why?

Answer 1

Today the Ricardian model of government debt is more relevant and credible than the tradition view of government debt.

The Ricardian view was named after the David Ricardo, who was celebrated for the contribution of theoretical arguement.

The Ricardian view of public debt use the logic of forward looking consumer to examine the impact of fiscal policy. The consumer may concieve that as the government is minimising taxes without reducing the government expenditure and by this it would not increase their permanent income. The government is allowing a budget deficit by financing the tax cut, which ultimately mean that, in the future the government will have to increase the taxes to pay-off the debt and the climbed interest. Which means that a decrease in tax today linked with a tax hike in the coming days. A decrease in the tax rate reschedules the burden and it does not decrease the burden.

While in the traditional view of public debt seem that a decrease in tax energize the consumer spending and reduces the national saving. The reduction in saving increase the interest rate, which ultimately force out the investment. (Keynesian model)

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