Research published by the Institute of Economic Affairs today highlights how stimulus measures pursued by Western governments in response to the economic crisis have not worked, and why, without drastic fiscal and tax reform, Western countries will not resolve their sovereign debt crises.
Taken from a lecture delivered for the Institute earlier this year by Prof. Robert Barro, the report provides a stark warning to the coalition government to hold the course on deficit reduction and resist temptation to embark on any ‘Plan B’.
Fiscal stimulus packages might increase output in the short-run, but the long-term effect is negative
- Growth might be boosted in the first year; but the effect drops in the second
- By the third year, the public debt has been inflated substantially and it has to be repaid – not through
further borrowing, but through tax rises
- This has a further negative effect and can dampen economic growth, or even risk another recession
- Indeed we may currently be feeling the negative effects of the stimulus packages embarked upon in