Question

In the aftermath of the 2007–2009 recession, the U.S. national debt rose to record levels as the federal government used expansionary fiscal policy to speed up the economic recovery. This led some politicians to propose a significant reduction in the size of government in order to balance the budget. Would such a policy be expansionary or contractionary in nature? What factors would determine whether or not such a policy would harm economic growth?

Answer 1

First, we must classify fiscal policy, which may be contractionary when the government wants to cool the economy, or expansionary when the government wants to stimulate the economy.

In the 2008 crisis, the government increased its spending to stimulate the economy, so the government adopted an expansionary fiscal policy.

However, rising spending has made the state swell. The purpose of reducing the size of the state to balance the budget is a contractionary policy aimed at reducing the state's spending.

Both policies can stimulate the economy if done at the right time. In the context of the crisis, it makes sense to increase government spending. However, after the economy improves, to stimulate the economy, the state must have a balanced budget. This is essential for attracting private investment and increasing the economy's productivity.