Consider the evidence presented in Charts 4a to 4d. The first point to not is how the fiscal deficits have been declining quite rapidly as shares of GDP in all the advanced countries taken as a group, to very low levels. In fact, in terms of structural deficit (that is, accounting for the fact that fiscal deficits move with business cycles, increasing in slumps and declining in booms), the fiscal deficit in the major advanced economies was less than 2 per cent of GDP in the latter half of the 1990s and has been less than 1 per cent thereafter.

Chart 4a >> Click to Enlarge
 
In the United States, the boom was originally led by large increases in government spending combined with tax cuts. In the mid-1990s, however, the US, despite being the country with the international reserve currency, chose to curtail its fiscal deficits initially. And when the US government was confronted with surpluses in the course of the boom triggered by private spending, it chose to hand over some part of those surpluses to the private sector in the form of tax cuts. As Chart 4b shows, since 1999 the US government budget has been in surplus (negative deficit indicates surplus).

Chart 4b>> Click to Enlarge
 
Nevertheless, the US economy continued to surge ahead in growth terms over this period. The demand increase was therefore entirely private sector-led, fuelled by debt-driven household consumption increases which were inspired by the capital gains made by those with some direct or indirect investment in stocks and shares. Since the middle of 2000, however, such capital gains have turned negative.
 
However, fiscal policy has responded by becoming more expansionary only in the very recent past, with expenditure increases of just under $100 billion being announced in the wake of the terror and anthrax attacks. Instead, over most of 2001, official policy has been directed towards a looser monetary policy, with the US Federal Reserve announcing six interest rate cuts over the course of the year. However the interest rate cuts alone have done very little to push the economy out of the current recession.
 
In Europe, the attempts at fiscal compression seem to have gone much further than even the fairly stringent requirements of the Stability and Growth Pact. Both the actual and structural fiscal deficits (shown in Chart 4c) since 1998 have been amazingly low, well below 1.5 per cent of GDP, despite the evident recession and the continuing high level of unemployment. Given the supposed political domination of Social Democratic parties in most of the government of Euro area countries, this pattern obviously requires greater political economy analysis.

Chart 4c>> Click to Enlarge
 
But the most striking pattern is that of the Japanese economy (Chart 4d), in which the fiscal stimulus appears to have been used with much effort but to little effect over the past few years. The Japanese government budget has moved from the modest surpluses which characterised the decade until 1985, to very large deficits amounting in some years to nearly 8 per cent of GDP. These were part of the efforts to pump-prime the system, along with low nominal interest rates that have reached near-zero levels. But still they have not been able to lift the Japanese economy out of the deflationary spiral.

Chart 4d>> Click to Enlarge
 
What do these contrasting fiscal patterns and their even more contrasting results suggest ? It would be wrong to infer from these that fiscal policy is not an important means of changing levels of economic activity in the advanced capitalist economies. However, these data do suggest that the pattern of fiscal stance, of the kind of spending and taxation decisions that are made, may be even more significant than the absolute levels. Crucially, they are important because they can change levels of employment, and these in turn play an important role in affecting expectations of economic agents in the economy.
 
Thus, in the US economy, the fiscal stance could be low because the consumption boom was associated with employment growth which in turn added to higher private spending. Conversely, in Japan the combination of fiscal stimulus and interest rate cuts was not sufficient to reverse the trend of declining employment opportunities. These led to depressed expectations, which in turn meant that additional incomes tended to be saved to insure against future job loss, and therefore did not translate into higher economic activity.