The European fiscal rules and the debt sustainability analysis that underpins them are grounded in supply-side growth theory. This perspective not only restricts fiscal policy to a short-term stabilizing role but also leads to an inadequate assessment of public debt trajectories. In this article, we propose adopting a demand-led growth framework—particularly the supermultiplier—as a more suitable analytical basis for evaluating fiscal policy. In these models, economic growth is driven by the dynamics of autonomous demand components, including public spending. As a result, fiscal policy plays a more substantial role than simply smoothing cyclical fluctuations around a supply-determined path. We identified three main avenues through which the supermultiplier approach can inform fiscal policy analysis: assessing the short- and long-term effects of changes in public spending on GDP growth, analyzing public debt sustainability under alternative fiscal scenarios, and evaluating the outcomes of different fiscal strategies in specific historical episodes within the literature on "growth regimes". As an illustration, we applied a supermultiplier model to the Spanish economy to contrast the impact of fiscal policy following the global financial crisis and the COVID-19 pandemic. While austerity measures during the former deepened the recession, expansionary fiscal policy in the latter case supported a faster recovery. Paradoxically, fiscal tightening was accompanied by rising debt-to-GDP ratios, whereas public debt has declined rapidly since 2021. In the current context, this approach could be especially valuable for revisiting the European Commission's Debt Sustainability Analysis methodology.
Citation: Elena Segarra, Jorge Uxó. 2025: Demand-led growth, the supermultiplier, and fiscal policy: a review of the literature and some applications to the European and Spanish context, National Accounting Review, 7(4): 476-500. doi: 10.3934/NAR.2025020
The European fiscal rules and the debt sustainability analysis that underpins them are grounded in supply-side growth theory. This perspective not only restricts fiscal policy to a short-term stabilizing role but also leads to an inadequate assessment of public debt trajectories. In this article, we propose adopting a demand-led growth framework—particularly the supermultiplier—as a more suitable analytical basis for evaluating fiscal policy. In these models, economic growth is driven by the dynamics of autonomous demand components, including public spending. As a result, fiscal policy plays a more substantial role than simply smoothing cyclical fluctuations around a supply-determined path. We identified three main avenues through which the supermultiplier approach can inform fiscal policy analysis: assessing the short- and long-term effects of changes in public spending on GDP growth, analyzing public debt sustainability under alternative fiscal scenarios, and evaluating the outcomes of different fiscal strategies in specific historical episodes within the literature on "growth regimes". As an illustration, we applied a supermultiplier model to the Spanish economy to contrast the impact of fiscal policy following the global financial crisis and the COVID-19 pandemic. While austerity measures during the former deepened the recession, expansionary fiscal policy in the latter case supported a faster recovery. Paradoxically, fiscal tightening was accompanied by rising debt-to-GDP ratios, whereas public debt has declined rapidly since 2021. In the current context, this approach could be especially valuable for revisiting the European Commission's Debt Sustainability Analysis methodology.
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Elena Segarra, Jorge Uxó. 2025: Demand-led growth, the supermultiplier, and fiscal policy: a review of the literature and some applications to the European and Spanish context, National Accounting Review, 7(4): 476-500. doi: 10.3934/NAR.2025020
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