The Economic Effects of Long-Term Fiscal Discipline

Brief

The Economic Effects of Long-Term Fiscal Discipline

Abstract

This paper examines long-term fiscal discipline and economic performance, with two main results. First, declines in budget surpluses (increases in deficits) reduce national saving and therefore reduce future national income, regardless of their effect on interest rates. Second, increases in expected future deficits raise long-term interest rates. Thus, the costs of long-term deficits are significant and need to be compared carefully to the potential benefits of tax and spending changes that increase deficits.

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