Fiscal multiplier
Topic: Government Budget, Fiscal Policy and FRBM · NCERT: Beyond NCERT
Meaning
The fiscal multiplier is the change in total output caused by a one-unit change in government spending or taxes. In the simple Keynesian model, where c is the marginal propensity to consume (the share of each extra rupee that people spend):
- Government expenditure multiplier = 1/(1 − c)
- Tax multiplier = −c/(1 − c)
In the real world its size depends on three things:
- how much slack the economy has (the multiplier is bigger in a recession);
- import leakage, where money spent on imports leaves the economy;
- whether monetary policy keeps interest rates low.
Example
If c = 0.8, the expenditure multiplier is 5. So ₹100 crore of extra government spending raises income by ₹500 crore. For India, an NIPFP study (2015) put the capital expenditure multiplier at about 2.45 and the multiplier for revenue spending and transfers at about 0.99.
Don't confuse with
- Balanced budget multiplier: equal rises in spending and taxes. It always equals 1.
Related concepts
- Fiscal policy
- Lump-sum tax
- Government expenditure multiplier
- Tax multiplier
- Transfer multiplier
- Balanced budget multiplier