A Short Note on Debt-Neutral Fiscal Policy

Dasgupta, Zico (2021) A Short Note on Debt-Neutral Fiscal Policy. Working Paper. Azim Premji University, Bengaluru.

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Abstract

One of the central concerns against increasing expenditures in the recent period has been the possibility of an adverse impact on debt-GDP ratio. Once stability of debt-ratio is regarded as a policy-objective, the aggregate expenditure that is consistent with the stability condition gets determined by the given level of output growth rate and revenue receipts. Instead of perceiving expenditures to be determined by the debt-stability condition, this short note attempts to lay bare the conditions under which the debt-stability condition is restored despite increasing the growth rate of non-capital primary expenditure to a targeted level. The targeted level can be perceived as one which fully compensates the income loss of labour during the pandemic. In contrast to conventional wisdom, the possibility of increasing non-capital expenditures is explored not by reducing capital expenditures, but rather by increasing the latter. Using the multiplier value of capital expenditures estimated by the RBI, it is argued that the debt-ratio would remain unchanged despite increasing the growth rate of non-capital primary expenditure if the capital expenditures growth rate is allowed to increase in a specific proportion.

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Monograph (Working Paper)

Authors:

Dasgupta, Zico

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