Fiscal policy efficacy and the politics of austerity.

Fiscal multipliers gauge the effects of fiscal policy on output, with high multiplier values indicating a significant beneficial effect of expansionary fiscal policy on economic activity (see Clift 2019: 1219-21). This apparently arcane, technical topic is in fact revealing of crucially important underlying principles of Political Economy. It recalls competing Keynesian and neo-classical visions of the appropriate role of the state, and theories of economic growth.

The difference of view concerns which economic policy levers governments can pull, and to what effect, when faced with weak demand and/or a prolonged downturn. Fiscal multipliers were a central theme of acrimonious policy debates which animated the politics of austerity. This went to the heart of competing visions of fiscal policy, since large fiscal multipliers would point to a sizeable adverse effect of fiscal consolidation on economic growth. Conversely, were fiscal multipliers found to be negative (as advocates of austerity argued) then this would corroborate the ‘expansionary fiscal contraction’ thesis

Debates about fiscal multipliers are in fact redolent of disputes between Keynesians and neo-classical economists about the appropriate role of the state. These long-debated ideas offer different visions of which economic policy levers governments can pull, and to what effect, when faced with a collapse of demand.