Overall Arguments on Fiscal Deficits
As explained, there is much controversy about fiscal deficits. One important issue is the effect of a counter-cyclical fiscal policy. If the effect is marginal, we should pay significant attention to the cost of this policy. For example, we should worry about the transference of the fiscal burden to future generations. In contrast, if Keynesian policy is very effective and the government performs very well, it becomes desirable to utilize the benefit of fiscal deficits to a great extent. So far, the empirical evidence on the efficacy of Keynesian measures is mixed. Thus, among professional economists, the Keynesian model has critics and adherents.
Nevertheless, there is a certain level of agreement about the policy implications of a fiscal deficit. First, a fiscal deficit could be beneficial in some instances; indeed, we should utilize a fiscal deficit in a recession. Some may argue that even if the multiplier effect of a fiscal policy is small, it is desirable to use a fiscal deficit to alleviate the bad outcome of a macro shock. Although there are disagreements on the mechanism of a recession and the seriousness of unemployment, many people agree that a fiscal deficit in a recession has benefits. Second, long-run expanding fiscal deficits are normally detrimental. If fiscal management is not sustainable, it also hurts the overall economy as well as the public sector.