Fiscal Multipliers (A2 Macroeconomics)

If you are currently studying A2 Economics through OCR you are likely to already be fairly familiar with the pre-release stimulus material. Within each section of this material a variety of key terminology that you will not necessarily study in depth in class are used. In the introduction of the stimulus material, fiscal multipliers are mentioned:

"Later in 2012 the IMF published research which suggested that fiscal multipliers in a number of countries were much higher than previously thought and estimated these to be in the range of 0.9 and 1.7"

A fiscal multiplier measures the final change in national income (real GDP) that results from a deliberate change in either government spending and/or taxation. For example, if a government spends £1 million on a project that causes GDP to increase by £1.5 million then the fiscal multiplier for this project was 1.5. Several factors affect the size of the fiscal multiplier. Some of these include:

• The nature of the fiscal policy. In terms of fiscal stimulus, Keynesian economists believe that the size of the fiscal multiplier effect is higher for government spending than for tax cuts.
• The Availability of credit. As demand rises, it will be necessary for credit to be easily available to those firms that require it in order to fund production increases and capital investment. 
• Monetary Policy. For example, government spending through borrowing that leads to higher interest rates may result in a smaller fiscal multiplier as firms may feel less inclined to borrow and consumers may increase their marginal propensity to save (MPS).
• Levels of international trade. The more open an economy is, the greater the extent to which higher government spending or tax cuts will feed into rising demand for imported goods and services, lowering the impact on domestic GDP.  
• Confidence. Consumers MPS might be higher if there is uncertainty about job prospects, future income and inflation. 

It is possible for the fiscal multiplier to be less than one, as seen in the extract from the introduction to the pre-release material. This is the case if the change in government spending or tax rates is greater relative to the change in national income. This could occur if initial injections into the economy are saved rather than consumed. It may also occur if spending was received by foreign MNCs rather than by domestic firms.