Fiscal policy

The government debt is a function of spending and taxes.
One way of expressing the constraint is that the change in debt (the deficit) is equal to the primary deficit plus interest payments on the debt.
The primary deficit is the difference between government spending on goods and services, G, and taxes net of transfers, T.
The evolution of the ratio of debt to GDP depends on four factors: the interest rate, the growth rate, the initial debt ratio and the primary surplus.
Under the Ricardian equivalence proposition, a larger deficit is offset by an equal increase in private saving. Deficits have no effect on demand or output.
The accumulation of debt does not affect capital accumulation. In practice, however, Ricardian equivalence fails and larger deficits lead to higher demand and higher output in the short run. The accumulation of debt leads to lower capital accumulation, and thus to lower output…

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