The Impact of Fiscal Policy on National Income

The past decade has witnessed a growing recognition of the economic effects of government finance. Government expenditures and revenues, government borrowing and debt repayment are studied, not for their impact on the Treasury, but for their impact on the economy. It is recognized now more than ever before that each aspect of government finance may be used as an instrument of economic policy to influence the size of the nation's income or alter the character of the nation's output. At first the problems of the depression and now the necessities of the war have converted “government finance” into “fiscal policy.” The theory of fiscal policy, reborn in the depression, nurtured during the recovery and matured in the war, has become the handmaiden of the government official and the political economist. In spite of the great amount of attention it has received, the theory of fiscal policy still lacks complete co-ordination of its various faculties and still suffers from frequent reversion to its childhood days. During the time of deep depression when the multiplier theory was developed it was taken for granted by many economists that deficits were the appropriate instrument for raising the level of national income. Since widespread unemployment and underemployment existed there was little need for differentiating real from money income, since a general rise in prices was not very likely and, in any case, was desirable. During the war, however, we wish to raise only the real income or the physical output, and then only the output of war materials, and keep down as much as possible the money national income and the price level. How must the theory of fiscal policy be changed as a result of these new objectives and altered conditions? And when the war is over will we have to resort to deficit-spending to prevent a depression? Are deficits, which were required to raise the level of national income, appropriate for maintaining a high level of national income? We must exercise the greatest care in answering these questions and we must guard against glibly applying some ready formula which we ourselves have carried over from the pre-war days of business depression. It is necessary first of all to examine the structure of fiscal policy (Part i) and trace through the interrelations among expenditures, taxation, borrowing, debt repayment, and national income (Part ii). Then we can see how fiscal policy may be used to achieve desired ends and avoid dangerous pitfalls duri