DP84 | Taxation Versus Spending as the Fiscal Instrument for Demand Management: A Disequilibrium Welfare Approach


Publication Date


JEL Code(s)


Programme Area(s)



The microeconomic foundations provided by the 'disequilibrium' macro-modelling approach of Barro-Grossman-Malinvaud are used to compare the performance of government spending and taxation as instruments of fiscal demand management in achieving a welfare optimum. Spending is successively treated as 'waste', 'consumption' and 'investment'. In all cases, when bond-financed deficits are permitted, spending should be set with regard only to the full employment situation, leaving taxation as the instrument for maintaining full employment. Only when a balanced-budget constraint is imposed are there grounds for spending to be set above this level. This may occur when (a) an investment 'accelerator' exists, (b) there is utility of leisure, and (c) spending provides utility.