The Fiscal Multiplier

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Excerpt from the "Bank of Israel – Annual Report for 2012" to be published soon:


 

  •  In Israel, as in other developed countries, fiscal policy affects the short-term GDP growth rate.

 

  •  The fiscal multiplier is the ratio of the percentage change in GDP to the percentage change in the fiscal variable. The fiscal multipliers in Israel, with respect to both public consumption and taxes, are less than one. In other words, the rate of change in GDP as a result of a change in public consumption and/or taxes on growth is less than the size of the change.

 

  •  An increase in public consumption financed by an increase in taxes has no short-term effect on GDP.