Expansive Fiscal Policies and Supply- Demand Imbalance: A Chicken and Egg Problem?

LV Bingyang

School of Finance, Renmin University of China

Abstract:

It is generally accepted that governments favor expansive fiscal policies to address an economic scenario in which supply exceeds demand. In other words, economic imbalance is regarded as the cause of the problem and fiscal expansion as the result. However, this paper posits that China’s expansive fiscal policies may also be a major cause of its economic imbalance, and that fiscal expansion and economic imbalance create cumulative causation. Specifically, China’s tax system, characterized by a regressive commodity tax, intensifies constraints on domestic consumption while distributing a large proportion of national income to government and enterprises; supply-demand imbalance prompts the government to expand fiscal expenditures and increase taxes, which further exacerbates this imbalance. Thus, even as the country faces a macroeconomic imbalance, the strong measures it adopts in response may stimulate economic growth in the short term, but in the long term, they may do exactly the opposite and create the next economic crisis.

Key words: tax system, fiscal policies, economic imbalance

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