Suppose that most government spending was on capital goods that contri

Suppose that most government spending was on capital goods that contribute to economic growth. How would that affect the Ricardian equivalence debate?

What will be an ideal response?

ANSWER

A key link in the logic of Ricardian equivalence is that tax cuts today must result in tax increases in the future. If instead it is anticipated that economic growth will generate the tax revenue required to repay government debt, then today’s decrease in government saving need not be matched by an increase in private saving. Consumption may rise, and some private investment may be crowded out.