Self-defeating austerity? Evidence from 1930s� Britain

crafts, nicholas; mills, c. terence;

Self-defeating austerity entails �perverse effects� of fiscal consolidation such that fiscal indicators deteriorate. Inter alia, this depends on the size of the fiscal multiplier as Keynes (1933. The Means to Prosperity. London: Macmillan) underlined. We find that the government expenditure multiplier was less than 1 in 1930s� Britain. Austerity was not self-defeating in the long run and even its initial impact probably did not raise the public debt-to-GDP ratio.
In the later 1930s, therewas a �fiscal free lunch� in that deficit-financed government spending would have improved public finances enough to pay for the interest on the extra debt.