Is public spending supply or demand-side economics? 

Although the ECB and the IMF argue that government spending impacts consumption and satiates demand, there is very little consensus amongst practitioners whether government implements supply or demand-side economics.

At its rudiment, the question asked is whether government is the supplier of goods such that it may influence the Aggregate Supply (AS) curve.

Typically, supply-side stimulus increases output without accelerating inflation by improving productivity; whereas demand-side stimulus increases output while accelerating inflation by increasing available income.

The State supplies many goods that improve productivity such as education, R&D and infrastructure. When the State improves the supply of public goods affecting the production function, it is factually incurring in supply-side economics. Some improvements, such as a wage increase, are arguable (see below) whereas others, such as more seats or new courses, are incontestable.

Conversely, when the State reduces consumption and personal income taxes, when it increases welfare spending or when it increases civil servants’ wages above productivity it is implementing demand-side economic policies.

Research to the ECB and the IMF concluded government spending increases consumption while depressing investment and EU spending is demand-driven. Both assertions become debatable considering the helpful distinction above.

The EU is seldom a direct supplier of public goods. The EU acquires public goods such as R&D from public and private contractors such as Higher Education institutions and firms. 

Because the EU sets financing priorities, it affects the supply-side of the economy by lowering the cost of an R&D product if and only if the output is a public good – that is, unless the EU agrees with privatising profit from its investment. 

With this distinction in mind, is the EU Budget delivering supply or demand-side stimulus?


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