From a theoretical perspective, the economic impacts of fiscal policy
depend onwhether one takes a Keynesian, Classical or Ricardian viewof
the economy. Keynesian theory sets out the prescription as to the appropriate
role of fiscal policy in stabilising economic fluctuations. In particular,
similar to automatic stabilisers, discretionary fiscal policy should
also act in a countercyclical manner. The mix of discretionary and automatic
stabilisers will depend on the extent and composition of the role
of government in the economy. Contrary to the Keynesian view of fiscal
policy, a Ricardian view stipulates that policy can have no impact on aggregate
demand as any public borrowing will be offset by the private
savings of rational households. On the other hand, classical economists
emphasise that fiscal policy crowds out private sector activity in markets