The new President of France aims to balance the budget by 2016. A growth policy will do that, because increases in output generate revenue and reduce social support spending.
It was GDP growth, albeit weak, that lowered the deficit from minus 7.1 percent of GDP in 2010 to minus 5.7 in 2011 (with a primary deficit of minus 3.3).
The combination proposed by Francois Hollande of increased taxation and a greater increase in expenditure is not only a viable alternative for France, it is rational economic policy.
The part of the expansionary policy that would be funded through borrowing is certain to be at interest rates far below those during 1993-95, when the overall deficit averaged almost six percent of GDP and the public sector borrowed at over seven percent.
The new economic program devotes a substantial part of the rise in expenditure to public investment, designed to increase capacity and lower production costs in France through improved infrastructure.
This is sound macroeconomic policy: a stimulus whose short term effect is to bring the economy close to full employment, and whose medium term effect is to increase productive capacity. The first realizes the economy’s potential and the second increases that potential.
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