Barro-Ricardo Equivalence

The Barro-Ricardo Equivalence suggests that government borrowing and spending do not affect overall economic activity or national savings because people anticipate future taxes needed to repay debt. When a government borrows, individuals foresee higher taxes later and may save more now to prepare for those payments. As a result, increased government spending financed by borrowing is offset by increased private savings, leaving total demand, income, and economic growth unchanged. Essentially, in this view, government borrowing simply shifts the timing of taxes and savings rather than expanding the economy.