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AbstractTextbook orthodoxy maintains that increases in the cyclically adjusted budget balance (i.e. reductions in the deficit) withdraw demand from an economy. Those Keynesian economists who believe that fiscal policy is the most powerful single influence on changes in demand expect 'fiscal contraction' to be accompanied by below‐trend growth or even declines in output. This article, a response to Martin Wolf's 2013 Wincott Memorial Lecture, considers this Keynesian view. Using a database prepared by the International Monetary Fund, it shows that since the 1980s 'expansionary fiscal contractions' have been the norm and not the exception in the USA and the UK. Keynesian support for fiscal activism is unsupported by a large body of recent evidence.

In its 1981 Budget, the Thatcher government discarded Keynesian counter-cyclical policies and cut Britain's public sector deficit in the depths of the worst UK recession since the 1930s. Controversially, the government argued that fiscal contraction would produce economic growth. In this specially commissioned volume, contributors examine recently released archives alongside firsthand accounts from key players within No. 10 Downing Street, HM Treasury and the Bank of England, to provide the first comprehensive treatment of this critical event in British economic history. They assess the empirical and theoretical basis for expansionary fiscal contraction, drawing clear parallels with contemporary debates on austerity in Europe, USA and Japan in the wake of the recent global financial crisis. This timely and thoughtful book will have broad appeal among economists, political scientists, historians and policy makers

Many economists are convinced that longer-term benefits from fiscal consolidation are in a trade-off with short-term deceleration in output growth. However, more recent research suggests that curbing fiscal imbalances contributes to faster growth already in the short term. This paper is about such non-Keynesian effects. Section two systematizes theoretical explanations. Section three reviews previous empirical research. Section four uses panel estimation techniques to examine the consequences of fiscal consolidation in New Member States. This analysis provides evidence that in those countries fiscal consolidation contributed substantially to the acceleration of output growth even in the short term. However, the exact channels through which non-Keynesian effects occurred could not be unambiguously identified in the paper. Section five takes the new step of a qualitative analysis of the outcomes of strong fiscal adjustments in the countries under consideration. That analysis shows that their experiences were quite similar to those of developed countries.

This paper contrasts the effects of balanced-budget reductions in government consumption on private consumption in the permanent income model and a model allowing for precautionary savings. We compare impulse responses of private consumption to temporary and permanent shocks to government consumption when agents do not observe the shocks directly or can distinguish between temporary and permanent shocks. Our simulations suggest that uncertainty about the permanence of government consumption reductions affect both the impact and the duration of private consumption whereas precautionary saving motives only affect the impact.

Research Highlights and Abstract This article Provides the first systematic analysis of the rise and diffusion of the idea of expansionary fiscal contractions (besides Blyth's book). Uses comparative case studies to assess the actual influence of this policy idea during the Great Recession. Provides a better understanding of the social construction of the financial crisis. Contributes to the growing scholarship on ideational political economy, including works documenting the resilience of the neoliberal paradigm. This article examines the rise and influence of a powerful economic idea: 'expansionary fiscal contractions'. The counterintuitive policy belief that severe fiscal adjustments can be expansionary was originally advanced by economists Francesco Giavazzi and Marco Pagano in the early 1990s. Over the years, this idea became dominant in certain epistemic communities, mainly through the literature on lessons from successful consolidations. In the event, the relationship between budget reduction and economic growth turned out to be one of the most contested issues in the aftermath of the financial crash of 2008. This article is divided into three main sections. The first section documents the social diffusion of this singular economic idea, from academia to policy networks. The second reports the 'battle of ideas'over fiscal consolidation during the Great Recession. The third section assesses the influence of the idea of expansionary contractions on actual policy choices by examining the politics of austerity in Ireland, Spain and the UK in the period 2008–2012.

In most European countries, the high real interest rates of the early 1980s combined with the large stock of public debt inherited from the 1970s to create a potentially explosive debt problem.