Governments' Fiscal Health Determines Economic Stimulus Effectiveness
The study found that fiscal multipliers, which measure the impact of government spending on the economy, are bigger when the government's financial situation is strong (low debt and deficits) compared to when it's weak. This effect is separate from the influence of the business cycle. The reason for this is that when the government's finances are weak, higher borrowing costs can discourage private investment, and households may cut back on spending in anticipation of future tax increases.