Economics, 3rd Edition

Fiscal Consolidation

The extent to which budget deficits should be a cause for concern is a persistent macroeconomic debate. 

Austerity measures imply that governments should consolidate fiscal policy to reduce deficits and 

 

‘balance the books’. In the UK, for example, the Chancellor of the Exchequer of the Coalition government 

has regularly referred to ‘balancing the budget’. Whether a government should seek to balance budgets 

is a source of debate amongst economists. Our study of financial markets showed how budget deficits 

affect saving, investment and interest rates. But how big a problem are budget deficits?