Balanced budget

The Haavelmo theorem ( after the Norwegian economist Trygve Magnus Haavelmo ) refers to the income effects budget balance, neutral fiscal policy and states that Y comes from an increase in government spending G, which is funded fully through additional taxes T, an increase in the equilibrium income / balance domestic product, the at least as large as the increase in government spending and the necessity to finance tax increase, thus:

Since, in contrast to households, a state has no marginal propensity to save, tax revenues, according to Haavelmo be 100% reinvested. Taking into account the multiplier effect can therefore be a higher national income calculated.

As a result of this theorem can be stated that the government can increase aggregate income / domestic product by raising more taxes, income which is immediately fully outputs ( so -called budget extension ).

From the theorem it can be concluded that an infinite extension of the tax-financed government spending could increase the gross domestic product to infinity. But in principle with economic laws that linear relationships can not be accepted in any order, but with stronger pulses nonlinearities were taken into account. So ( budget extension of the government account in this case ) can be used in an econometric model is not any strong pulses are input, are not to be unrealistic results.

Mathematical derivation

First, the multiplier a highly simplified economy is derived in the goods market. The investments are assumed to be constant. Neither do they react to a change in the interest rate (also because of the money market is not considered in the model), yet. Upon a change in income Disposable income is defined as.

The Haavelmo theorem assumes that additional government spending be offset by a corresponding tax increase. Therefore is set. It follows:

By forming the total differential, the effect of such steuerrefinanzierten increase in government spending shows:

The multiplier of an increase in government spending is thus 1 In plain language this means that the income increases Y to turn one unit for each additional unit G, which is funded through taxes. The disposable income, which is defined as, while remaining constant.

Alternative derivation

Alternatively, one could justify the Haavelmo theorem via the following derivation:

The multiplier effect on government spending increases demand as follows:

The multiplier effect of taxes reduces demand, but only to

Taken together, increase tax-financed government spending () the demand for

Criticism

As criticism of the multiplier approach different aspects are expressed:

• Neglect of human and functionally different propensities to consume
• Flexibility of wages, prices and interest rates in the medium to long term
• Dependence of current consumption from current income with a marginal propensity to consume is between zero and one ( absolute income hypothesis; contrary permanent income hypothesis; life -cycle hypothesis )
• Neglect of asset and capacity effects in the short-term analysis