Self-defeating austerity? Evidence from 1930s' Britain

Self-defeating austerity entails “perverse effects” of fiscal consolidation such that fiscal indicators deteriorate. Inter alia, this depends on the size of the fiscal multiplier as Keynes (1933. The Means to Prosperity. London: Macmillan) underlined. We find that the government-expenditure multiplier was less than 1 in 1930s' Britain. Austerity was not self-defeating in the long run and even its initial impact probably did not raise the public debt-to-GDP ratio. In the later 1930s, there was a “fiscal free lunch” in that deficit-financed government spending would have improved public finances enough to pay for the interest on the extra debt.