1 The purpose of fiscal policy

Before we turn to public debt and its dynamics, we should briefly reflect on what are the goals of fiscal policy, to understand in which context public debt arises. Broadly speaking, we can distinguish four different goals or purposes of fiscal policy:

Provision of public goods: The state must ensure that important goods of public interest, which are not provided by the private sector in a quantitatively or qualitatively desirable manner or which are even endangered by the economic activity of the private sector, are sufficiently and permanently available to the general public. These goods include, in the broadest sense, infrastructure in the areas of health, education, food, energy and security, as well as an intact and sustainable environment that offers good living conditions. The government can influence the provision of public goods by its decisions on expenditure and investment in infrastructure and environmental protection.

Income and wealth redistribution: The government collects taxes from the various actors and groups in society and redistributes the resulting income through its decisions on government spending. The extent of income and wealth redistribution through tax and transfer policies varies greatly from country to country.

Resource allocation: Government fiscal policy can influence the allocation of resources and the consumption and production structure of the economy through taxation, subsidies or investment, e.g. by subsidising certain sectors of the economy that the government considers important but which are underdeveloped or facing difficulties, or by taxing certain undesirable production and consumption activities that are harmful to the environment or public health, for example.

Stabilisation: Fiscal policy is used to stabilise the economy in response to cyclical fluctuations and economic disruptions. Expansionary fiscal policy aims to stimulate economic activity. In contrast, a contractive fiscal policy aims to slow down economic activity.

In pursuing these goals, fiscal policy also influences the level of public debt in the economy. There are two sides to public debt: On the one hand, it represents a burden on public finances, especially through the government’s interest expenditure. On the other hand, they represent an asset available to investors in the financial system.

In the course of the global financial crisis, public debt increased enormously worldwide due to bank bailouts and stabilisation measures against the deep recession. Again, during the corona crisis, public debt rose rapidly in many countries as governments sought to protect their populations from the virus and economic consequences of shutdowns in the economy and social life. Last but not least, climate change and the socio-ecological transformation represent a major challenge that will require a high degree of resource realocation, investment and the protection and provision of public goods, which will require governments to reorient their fiscal policies and priorities.

High public debt and what governments can do about it will therefore continue to be an important topic in economic policy debates. This course aims to provide some accessible materials to better understand and follow these debates even without deep prior knowledge.