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On the Dangers of Targeting the Budget Deficit

Published online by Cambridge University Press:  01 January 2023

J.O.N. Perkins
J.O.N. Perkins*
Affiliation:
University of Melbourne
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Abstract

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This paper examines a number of the deficiencies of the use of the budget balance, or changes in it, as an intermediate target for macroeconomic policy. It draws attention to a number of defensible alternative definitions of ‘the budget deficit’ - which may give conflicting indications of the direction in which the budget balance is moving. It then outlines some of the ways in which alternative measures for effecting a given change in the budget balance may have different effects on the principal objectives of macroeconomic policy. It is pointed out that even if a reduction in the rate of increase in government debt is in itself desirable, it is only after consideration of the costs and benefits of alternative ways of achieving that aim that one can logically decide what policy measures - and what consequent change in the deficit - are appropriate. An appendix draws on some simulations for the UK economy and for the OECD to illustrate how different measures having the same effect on the PSBR may have different relative effects on the various macroeconomic objectives.

Type
Research Article
Information
The Economic and Labour Relations Review , Volume 6 , Issue 1 , June 1995 , pp. 1 - 16
Copyright
Copyright © The Author(s) 1995

Footnotes

*

The author gratefully acknowledges comments from Max Corden, Ian McDonald, John Nevile and Neville Norman on earlier drafts, but none of them are responsible for remaining deficiencies.

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