Truth and Lies About Government Deficits

There is a lot of misinformation spread by politicians and much of the media on the topic of fiscal policy, particularly when it comes to the role and impact of government deficits. When the level of economic activity collapsed in the wake of the global financial crisis, government fiscal balances around the world moved toward, or into, deficit. To a degree, in some countries at least, this occurred as a result of appropriate policy responses to the depressed economic environment. To a larger degree, it was due to the automatic effect of declining income on tax revenues through what economists refer to as the automatic stabilizers. These are fortunately in place to cushion households and businesses from the worst effects of a downturn. Currency-issuing governments, facing no revenue constraint, always have the capacity to run deficits as required.

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