CRS – Can Contractionary Fiscal Policy Be Expansionary?
Can Contractionary Fiscal Policy Be Expansionary? Jane G. Gravelle Senior Specialist in Economic Policy and Thomas L. Hungerford, Specialist in Public Finance. January 11, 2013
“Just as economists generally consider spending cuts to be contractionary in the short run in an underemployed economy, they believe that deficits can be harmful in the long run by crowding out private investment. There is considerable agreement that the continuation of current tax and spending policies will lead to an unsustainable path of the national debt, largely because of the growth of mandates arising from the aging of the population and the growth in health care costs. Thus, to most economists current macroeconomic policy challenges involve a trade-off between the benefits of starting to address the debt problem earlier versus risking damage to a still-fragile economy by engaging in contractionary fiscal policy, or failure to continue with expansionary fiscal policy.”