Debt Management and the Fiscal Balance

This paper presents a method for integrating debt management into fiscal policy using principles derived from the work of Kalecki. It proposes dividing the government budget into a functional budget containing taxes and expenditure that may affect expenditures in the non-financial economy, and a financial budget containing taxes on wealth and higher incomes that do not affect expenditures in the real economy but do affect the liquidity of wealth portfolios. This gives the government two more or less independent instruments to manage economic growth and government debt. The respective balances between the functional and financial budgets then affect the fiscal multiplier showing how cases of expansionary fiscal contraction, contractionary fiscal expansion, expansionary financial instability, and deflationary financial instability may arise. The analysis applies to domestically financed debt.