Fiscal Policy as Credit Policy: Reassessing the Fiscal Spending vs. Private Debt Trade-Off

This paper revisits the dominant narrative that explains the substantial household credit boom as a substitute to fiscal redistribution, i.e. the "substitution" hypothesis, according to which fiscally-constrained governments substituted public safety nets by private credit. I argue instead that the credit and welfare state constituencies may not necessarily be the same and that far from fiscally constrained, governments have been actively using "fiscal policy as credit policy". I provide two sets of empirical evidence for such account: First, I find a positive within-country relationship between household debt and fiscal spending. Second, compiling a unique dataset of 550 fiscal subsidies adjustments in 50 countries since 1980, I show that fiscal and tax subsidies have been instrumental in driving household credit. These dynamics have distributional and financial stability implications as such tax subsidies typically favour higher income households and household debt booms have proven more dangerous than corporate ones.