Is it better for macroeconomic stability to increase public spending or to reduce it during a financial and/or economic crisis?
Dear Researchers, Scientists, Friends,
During economic crises, governments face a dilemma: whether to increase public spending to stimulate the economy or to reduce it to avoid excessive debt. Keynesian policy suggests fiscal stimulation, while neoclassical theory emphasises the need for budget balancing and expenditure reduction. The choice of the right solution depends on the conditions in the respective country and the effects that can result from one or the other strategy. According to the accepted research hypothesis, increasing public spending during a crisis stimulates the economy and accelerates recovery from recession. On the other hand, cutting public spending reduces debt but can deepen the crisis by reducing domestic demand. In addition, the optimal approach is to manage spending flexibly depending on the nature of the crisis and the current macroeconomic situation. In view of this, governments often face a choice between austerity policies and fiscal expansion. On the one hand, increased spending can stimulate the economy through increased demand for goods and services and job creation. On the other hand, increased state intervention in the economy can lead to budgetary imbalances and long-term debt problems. The 2008 financial crisis showed that excessive budget cuts in some countries deepened the recession, while countries that used fiscal expansion recovered more quickly from the crisis. The key question is under which conditions one of these approaches is more effective.
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And what is your opinion on this matter?
Please answer,
I invite everyone to join the discussion,
Thank you very much,
Best wishes,
I invite you to scientific cooperation,
Dariusz Prokopowicz
While increasing public spending is often favored during economic crises to stimulate recovery, the decision must be carefully balanced against potential long-term fiscal implications and the context of the crisis at hand.
The decision to increase or decrease public spending during a crisis should be made based on the specific circumstances of the crisis, including its nature (e.g., financial crisis vs. natural disaster), existing economic conditions (e.g., unemployment rates, inflation), and government fiscal health (e.g., levels of public debt).If the economy is facing inflationary pressures, reducing public spending can help cool down demand and stabilize prices. Sometimes, crises expose structural weaknesses in the economy. Reducing spending can allow for a reallocation of resources towards more productive areas or necessary reforms. In some fiscal contexts, reducing public spending can be seen as a commitment to long-term fiscal discipline, which may help in restoring investor confidence and stability in the financial markets. These are my economic thoughts to your important practical question, dear Dariusz Prokopowicz . Best: stephen
La respuesta depende del tipo de crisis y de las condiciones macroeconómicas preexistentes pero podemos concluir que en recesiones fuertes o crisis de demanda (ej. la Gran Depresión, crisis financiera de 2008, COVID-19), aumentar el gasto público suele ser la mejor opción para reactivar la economía. Ejemplos famosos incluyen el New Deal de Roosevelt y los paquetes de estímulo fiscal tras la crisis financiera de 2008.
Sin embargo, si la crisis tiene un componente inflacionario o de deuda alta (ej. crisis de la deuda soberana europea), puede ser necesario aplicar medidas de austeridad o reducción del gasto para restaurar la confianza en los mercados.
As Stephen Ternyick states above, all crises are not the same. So the type of response depends upon the nature and context of the situation. And, perhaps more importantly than deciding to increase or decrease spending is to determine:
1) What should public funds be spent on? Some spending programs are productive and restorative. Others are not.
2) How should public funds be raised? All taxes and fees are not the same. Some stifle productivity and economic vitality whereas others stimulate it. It's also important to evaluate the behavioral incentives embedded in different taxes and fees to make sure that they encourage appropriate behavior (such as resource conservation) and discourage inappropriate behavior (such as resource hoarding and speculation).
It depends on two things:
- What is your perception of public debt? Is it something that needs to be limited or is it just numbers on a ledger?
- Are you looking at the underlying systemic influence of the current debt-based, interest bearing monetary system?
Our current monetary system actually is a root cause of economic instability (https://www.imf.org/en/Publications/WP/Issues/2018/09/14/Systemic-Banking-Crises-Revisited-46232, Article Interest-bearing loans and unpayable debts in slow-growing e...
andArticle Computational Analysis of the Properties of Post-Keynesian E...
). It also contains the wrong incentives (lots of loans in a boom, few loans in a downturn). This can be solved by another, inherently stable, monetary design (Preprint An alternative general-purpose money supply model for a futu...
).
الأفضل ان يكون هناك انفاق حكومي لتحقيق الاستقرار الكلي .. لكن من الضروري ان يوجه هذا الإنفاق نحو القطاعات الأكثر استجابة وتتمتع بمرونة عالية نحو تحقيق الاستقرار.
حيث ان مواجهة الأزمات تكمن في زيادة الإنفاق الموجه وهذا ما حدث في الأزمة المالية 2008 والأزمة الصحية 2020 .
Dariusz Prokopowicz
You've highlighted a critical dilemma that governments encounter during economic crises regarding their approach to public spending. While both Keynesian and neoclassical theories provide useful perspectives, there's a growing body of evidence suggesting that increasing public spending tends to be more advantageous in times of downturn. Historical instances, especially during the 2008 financial crisis, show that countries that adopted fiscal expansion—by implementing stimulus packages—recovered faster than those that imposed austerity measures.
Although reducing public spending to manage debt might seem wise in theory, it often results in decreased domestic demand, which can worsen downturns and extend crises. This issue is particularly significant during severe recessions when consumer confidence and spending are already struggling. Additionally, as you pointed out, managing spending flexibly is crucial; governments can focus on critical services and investments that provide immediate support while also establishing a foundation for future growth.
Ultimately, the success of either method depends on the specific economic conditions and the extent of the crisis. However, history indicates that proactive fiscal stimulus typically promotes a faster recovery and greater economic stability than austerity measures, which can prolong recessions and inflict lasting harm. Thus, a strategically increased public spending approach, customized to the unique challenges of each crisis, is often the most effective method for fostering macroeconomic stability.
For most economic crises, increasing public spending is the go-to strategy for stabilizing the economy, creating jobs, and boosting demand. However, reducing public spending might be necessary in cases of fiscal unsustainability or inflationary pressures. Ideally, governments should adopt a balanced, context-specific approach, combining targeted spending with fiscal discipline in the long run.
There is hardly any doubt that during economic crisis the private spending reaches its nadir and there are scarce resources in the private sector which can be deployed besides the capability of this sector to take risk is further challenged for the reason that the future looks uncertain and bleak ,the governments however have to think differently and are expected to be the torchbearer .The governments have sufficient time and the power to recover its investments in future should there be a speedy recovery.It is also a fact that Governments have a larger role ,that is ,the overall socio-economic development of the country and last but not the least it is the Government only to which the citizens turn to during such crises.
Dear Researchers, Scientists, Friends,
Considerations on the effectiveness of increasing or reducing public spending during a financial and/or economic crisis represent a crucial area of research into macroeconomic stability, which requires further in-depth analysis that takes into account the specific nature of a given crisis, the structure of the economy, and social and market responses. In light of the presented hypothesis, it is worth extending the research to examine the long-term effects of different fiscal strategies, such as their impact on private investment, financial sector stability, consumer confidence levels, and the economy’s resilience to future shocks. Promising research directions include hybrid models that combine elements of expansionary and austerity policies depending on the phase of the economic cycle, as well as the analysis of the role of innovative financial and monetary instruments (e.g., central bank digital currencies) in mitigating the consequences of crises. Attention should also be paid to how public spending influences social inequalities and supports key processes such as the green and digital transitions, which are becoming increasingly central to economic recovery strategies. I would like to express my sincere gratitude to all researchers and scholars who contribute to this important field, enriching the debate with new perspectives and empirical data. At the same time, I would like to emphasize that I am open to academic collaboration in this area, including joint publications and research projects. I warmly invite all interested parties to continue this highly important discussion, which has vital significance not only for economic theory but also for shaping sound economic policy in challenging times.
Best regards,
Dariusz Prokopowicz
Most policy makers suggest apply Countercyclical fiscal policy is a government strategy that aims to stabilize the economy by opposing the economic cycle. It involves adjusting spending and taxes to stimulate economic growth during a recession and slow economic growth during a boom.
En mi opinion aumentar el gasto público puede ser crucial para la estabilidad macroeconómica, especialmente en contextos de bajo crecimiento y alta desigualdad. Inversiones estratégicas en educación, salud e infraestructura impulsan la demanda agregada, generan empleo y fortalecen el capital humano, sentando bases para un crecimiento sostenible.
Sin embargo, es fundamental la calidad y la focalización del gasto, evitando la corrupción y asegurando que beneficie a las mayorías. Financiarlo con impuestos progresivos y una gestión fiscal responsable es clave para evitar la deuda insostenible. En economías dependientes de commodities, diversificar la producción y fortalecer la demanda interna a través del gasto público es vital para la estabilidad ante choques externos.
In many countries governments are increasing public spending in infrastructure and social programs, drive demand and create jobs, the problem is increase debt. On the other hand reducing spending to combat rising inflation can lead to economic slowdown and unemployment.
Governments have a key role on the economy, directly and indirectly influence the way (economic growth, macroeconomic stability). Which economic policy is better?. The Answer is difficult, because it depends of many factors in each country: social, political, geophrafical, etc. “Holistic means encompassing the whole of a thing, and not just the part”.
Contestandole Mtra. Martha Pantoja a su comentario…
Creo que el dilema planteado entre aumentar el gasto público para el desarrollo y controlar la deuda versus reducir el gasto para combatir la inflación se resuelve priorizando el bienestar social y el crecimiento inclusivo a largo plazo, dentro de un marco de responsabilidad fiscal y justicia social, algo muy parecido a lo que emprendio el presidente Lopez Obrador en nuestro pais.
Ahora la clave reside en un enfoque holístico, como bien señala usted en su texto, que considere las particularidades de cada país si nos referimos a nuestra latinoamerica. Aumentar el gasto público en infraestructura estratégica, educación y programas sociales es fundamental para abordar las profundas desigualdades estructurales de la región, impulsar la demanda interna, crear empleo de calidad y fortalecer el capital humano. Esto sienta las bases para una estabilidad macroeconómica genuina, basada en una economía más resiliente y equitativa, en lugar de una estabilidad impuesta por la austeridad.
Andrés, primero, muchas gracias. en respuesta a su comentario, aumentar el gasto público por si solo, no lleva al desarrollo económico que en la actualidad se mide a través de 3 variables claves: esperanza de vida, educación e ingresos. Las transferencias monetarias ayudan a reducir la pobreza. "Cómo el gasto social en México redujo la pobreza y la desigualdad del ingreso". Frederic Lambert, 2 de octubre de 2019. Fondo Monetario Internacional (FMI Blog).
También, es importante mencionar que la política económica y social debe considerar las enormes desigualdades sociales y brechas económicas por regiones en un mismo país. En México, hay regiones con alto crecimiento y desarrollo económico. Sin embargo, hay Estados de la Republica con altos niveles de pobreza.
La estabilidad macroeconómica, debería promover el crecimiento y desarrollo económico sostenible y proteger a los países frente a las crisis que pudieran presentarse y pueden ser choques internos o externos.
During a crisis, increasing public spending is generally better for macroeconomic stability, as it supports demand, prevents mass unemployment, and stimulates economic recovery; however, it must be targeted and temporary to avoid long-term fiscal imbalances and inflationary pressures.
During a crisis, increasing public spending is generally better for macroeconomic stability as it supports demand, employment, and confidence; austerity can deepen recessions and delay recovery, though the quality, efficiency, and sustainability of spending are critical to its effectiveness.
Increasing public spending (counter-cyclical policy) is generally preferred to stimulate demand and avoid deep recession, as seen in Keynesian frameworks.
Increasing public spending during a crisis is generally better for macroeconomic stability, as it boosts aggregate demand, supports employment, and mitigates recessionary effects—aligned with Keynesian principles—though it must be well-targeted to avoid long-term debt sustainability risks.
Increasing public spending during a crisis is generally better for macroeconomic stability, as it stimulates demand, supports employment, and can prevent economic collapse, especially when private sector activity contracts—though it must be targeted, efficient, and reversible to avoid long-term fiscal imbalances.
Increasing public spending during a crisis tends to be better for macroeconomic stability, as it injects demand into a faltering economy, supports vulnerable sectors, and can catalyze recovery—especially when monetary policy is constrained—though the long-term fiscal path must remain credible to avoid debt overhang.
Again, increasing public spending during a crisis is generally preferable for macroeconomic stability, as it sustains demand, supports public services, and mitigates unemployment, with historical evidence from Keynesian economics and recent stimulus responses underscoring the effectiveness of counter-cyclical fiscal policy.
Estimados Dariusz Prokopowicz , la pregunta sobre si aumentar o reducir el gasto público durante una crisis financiera o económica es central para la macroeconomía y, desde mi perspectiva, la evidencia y la ética apuntan claramente a la expansión fiscal.
La historia reciente ha demostrado que las políticas de austeridad durante una recesión son, en el mejor de los casos, contraproducentes, y en el peor, socialmente devastadoras. La crisis financiera global de 2008 es un claro ejemplo: los países que optaron por recortes presupuestarios excesivos, como Grecia, vieron cómo su PIB se contrajo en un 25% acumulado entre 2008 y 2013 (Fuente: Eurostat, 2014), lo que llevó a un aumento drástico del desempleo y la pobreza.
En contraste, países que implementaron paquetes de estímulo fiscal significativos, como Estados Unidos con su Ley de Recuperación y Reinversión de 2009 (aproximadamente $$$787 mil millones de dólares), lograron una recuperación más rápida. Este estímulo fiscal contribuyó a que el PIB de EE.UU. comenzara a crecer nuevamente en 2010, con un aumento del 2.5% (Fuente: Oficina de Análisis Económico de EE.UU., 2011).
La pandemia de COVID-19 reforzó esta lección. La respuesta global incluyó una inyección masiva de gasto público. En México, el gasto público como porcentaje del PIB pasó del 24.3% en 2019 al 28.4% en 2020 (Fuente: INEGI, 2021), una medida necesaria para mitigar la caída del PIB del 8.2% en ese año. Aunque esto generó presiones inflacionarias a posteriori, como usted menciona en su artículo, la prioridad era evitar un colapso económico y proteger a los más vulnerables.
Desde una visión progresista, el gasto público no es solo una herramienta para estimular la demanda; es una inversión social que protege empleos, sostiene los sistemas de salud y educación, y reduce la desigualdad. Si bien es crucial monitorear la deuda a largo plazo, la prioridad en una crisis es evitar una recesión más profunda y sus costos humanos. La gestión flexible del gasto es óptima, sí, pero con una predisposición clara hacia la expansión fiscal cuando la demanda privada se desploma y las economías necesitan un salvavidas.
The debate regarding whether to increase or decrease public expenditure during recession events is central to the macroeconomic policy debate. Keynesian economic models suggest that government spending is the magic bullet that can stimulate demand, generate jobs, and contribute to the rate of recovery. In contrast, neoclassical thinking tends to be suspicious of fiscal expansion and criticizes rising levels of inflation and unsustainable debt obligations.
The empirical evidence from empirical studies of the 2008 global economic recession supports the Keynesian view. The government stimulus measures in place immediately after the US and China's decisions to embrace the stimulus arguments facilitated a quick recovery relative to Greece and Spain's proposals of austerity measures that prolonged recession and delayed recovery on all measures. This would suggest, in a demand-side recession, that fiscal stimulus, if effective, can prove especially valuable in putting the economy back on a stable path again.
Fiscal stimulus through higher public expenditure has little foothold on a "one-size-fits-all" notion. The effectiveness of public expenditure depends on a combination of factors: the level of debt that is affordable; the potential effectiveness of spending relative to being nothing; and the type of crisis (i.e., a larger financial shock, or supply change shock). Any considerable change in spending that is misdirected may also incur unsustainable levels of debt.
Ultimately, therefore, a flexible and data-driven approach is the most prudent. The uptake of discretionary fiscal stimulus could be concentrated on exogenous shocks to economic systems that have no immediate end date, such as COVID-19, perhaps especially when interest rates are approaching zero or are in a private consumption slump.
To summarize, a rise in public spending, in times of crisis, is their best option for safeguarding macroeconomic stability, so long as expenditure is well-targeted and accompanied by a credible long-term fiscal policy.
temporary, targeted increases in public spending are generally stabilizing in demand-driven crises when financing is available; but if financing is limited or inflationary pressures are high, priority should be on targeted support and structural reforms, not broad permanent spending increases.
It depends: in demand-side recessions with idle resources, temporary, well-targeted public spending stabilizes incomes and output (supporting macro stability), but if a crisis is supply-side or debt-constrained, indiscriminate spending risks inflation and loss of confidence — the smart answer is targeted temporary fiscal expansion combined with credible fiscal plans for medium-term sustainability.
Macroeconomic Stability has a key role in each country, is one of most important economic policies (economic growth, low inflation, low unemployment, etc.). Also, because it has effects on social and political situation. It is an ideal State and objetive of the economy.
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