ADVANTAGES

These so-called austerity programs have aroused two sorts of controversy. First, some economists question whether big changes in fiscal policy are really needed. In Latin America, for example, some governments sought "heterodox" policies to reduce inflation without the recession that the orthodox approach almost always brings on. The heterodox approach argues that in high-inflation countries, the budget deficit is caused mainly by inflation, not the other way round. The argument is twofold. First, because there is a lag between when people earn income and when they must pay taxes on it, high inflation reduces real tax revenues. Second, inflation increases the nominal interest rate (and hence the budgetary cost of servicing past government debt).

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