Answer to Question #255552 in Microeconomics for Keitumetse

Question

public choice theory regarding public debt

Answer 1

The idea of “fiscal illusion” is due to the public choice school (see in particular Buchanan and Wagner, 1977). According to this argument voters do not understand the notion of intertemporal budget constraint for the government, therefore when (especially close to elections) voters see pending hikes or tax cuts (the public choice schools was especially concerned with the former) they reward the incumbent, and remain unaware of the consequences of such policies on public debt and the future costs of taxation needed to service it. The problem, according to the Public Choice school, is aggravated by the “Keynesian” policy stand. Politicians are eager to follow the Keynesian rule of increasing discretionary spending during recessions, but then they do not counterbalance it with cuts during booms. Thus, the result of keynesianism and fiscal illusion leads to persistent deficits and explosive debt levels.