Journal article
The Macroeconomic Implications of Balanced-Budget Tax-Financed Government Spending
Journal of Macroeconomics, Vol.90, pp.1-31
2026
Abstract
This paper examines the macroeconomic effects of balanced budget, tax financed government spending in a New Keynesian framework with Ricardian and hand to mouth households, nominal rigidities, and productivity enhancing public expenditure. Financing occurs via lump sum, consumption, or wage taxes, facilitating comparison under a strict balanced budget rule. Fiscal transmission hinges on household heterogeneity, preferences, shock persistence, and the supply side effects of spending and taxes. Multipliers are largest under non-distortionary lump sum taxes, moderate with wage taxes because of marginal cost and monetary channels, and smallest with consumption taxes, which distort incentives, labor supply, and inflation. Wage tax financing yields larger, persistent output responses, including a knife edge case where the productivity effect of government spending exactly offsets the contractionary demand effect, producing unit output growth without changes in private consumption, employment, or inflation. When the intratemporal elasticity of substitution equals unity, consumption tax financing renders fiscal policy neutral regardless of household heterogeneity. Otherwise, both the size and the sign of the multiplier reflect a tradeoff between tax induced distortions and supply side gains. Strong productivity effects can generate output expansions alongside declining inflation, while anticipated supply side effects introduce an expectations channel similar to that of news shocks.
Details
- Title
- The Macroeconomic Implications of Balanced-Budget Tax-Financed Government Spending
- Authors
- Sajid Anwar (Corresponding Author) - University of the Sunshine CoastSyed Zahid Ali - Lahore University of Management Sciences
- Publication details
- Journal of Macroeconomics, Vol.90, pp.1-31
- Publisher
- Elsevier BV
- Date published
- 2026
- DOI
- 10.1016/j.jmacro.2026.103807
- ISSN
- 1873-152X
- Copyright note
- © 2026 The Authors. Published by Elsevier Inc. This is an open access article under the CC BY-NC-ND license ( http://creativecommons.org/licenses/by-nc-nd/4.0/ ).
- Data Availability
- Data will be made available on request.
- Organisation Unit
- School of Business and Creative Industries; Indigenous and Transcultural Research Centre
- Language
- English
- Record Identifier
- 991262586302621
- Output Type
- Journal article
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