V. Saving Behaviour and the Effectiveness of Fiscal Policy

Private saving behaviour has important consequences for the effectiveness of fiscal policy... Fiscal policy has been used as an antidote to weak activity during the most recent downturn and fiscal consolidation has been delayed in some countries because of its perceived costs in terms of lower activity. However, the impact of fiscal policy on aggregate demand depends on the responses of private saving to changes in fiscal stance. In certain circumstances budget deficit shifts can be offset by simultaneous compensating changes in private saving. This chapter examines the possible extent of such offsets, focusing on the case where co-movements in private and public saving may be related to uncertainties about how long a budget deficit can be sustained and the consequent need to provide against future tax “surprises”. 1 Even though conscious “tax discounting” may be rare, experience in many OECD economies suggests that fiscal adjustments made for stabilisation purposes can often be associated with inverse movements in private saving. Depending on their extent, such responses raise important issues for policy-makers.