Pump-priming
Deficit financing and spending by a government on public works in an attempt to revive economy during recession is known as pump-priming. It is a countercyclical measure. It can raise the purchasing power of the people and thus stimulate and revive economic activity to the point that deficit spending will no longer be considered necessary to maintain the desired economic activity.
Fiscal Neutrality
When the net effect of taxation and public spending is neutral neither stimulating nor dampening demand, it is called fiscal neutrality. It is neutral, as total tax revenue equals total public spending.
Fiscal Drag
It is a situation where inflation pushes income into higher tax brackets. This results in increase in income taxes but no increase in real purchasing power. This is a problem during periods of high inflation. Government gains due to higher tax collections and the economy suffers as growth is dragged down due to less demand. In high-growth and high inflation economies (‘overheated’), fiscal drag acts as an automatic stabiliser, as it acts naturally to keep demand stable.
Crowding Out
Excessive government borrowing can lead to shrinkage of the liquidity in the market and force the interest rates to go up. Private investment is crowed out, because, liquidity availability is less and the interest rates are high. Investment suffers and growth decelerates. Also the government may not spend the borrowed resources well to generate returns. If the government deploys the funds well, it may have a crowding in effect: the infrastructure built can have a multiplier effect on investment, tax collections and growth.
