9. The case for ﬁscal policy 1 INTRODUCTION Chapter 8 made the point that ﬁscal policy can be a powerful instrument of economic policy. This chapter strengthens that point by putting forward the case for ﬁscal policy. The case for the use of ﬁscal policy and for governments to operate with an unbalanced budget (whether in surplus or deﬁcit) arises from the simple Keynesian proposition that there is no automatic mechanism which ensures that aggregate demand is sufﬁcient to underpin a high level of economic activity (Kalecki, 1939; Keynes, 1936). The notion that the budget should always be in balance (or even on average in balance) is rejected on the grounds that a balanced budget is generally not compatible with the achievement of high levels of aggregate demand. Further, although interest rates may have some impact on the level of aggregate demand, there are constraints on the extent to which interest rates can be varied (whether for reasons akin to a liquidity trap in operation which prevent the reduction of interest rates below a particular level or for foreign exchange considerations) and there are doubts relating to the potency of interest rates to inﬂuence aggregate demand. Many lines of argument have been developed to the effect that budget deﬁcits and ﬁscal policy are ineffectual and/or have undesired (and undesirable) effects. This chapter starts from a ‘functional ﬁnance’ perspective (discussed in the next section). This views the role of ﬁscal policy in terms of raising the level...
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