Ricardian Equivalence

Ricardian Equivalence is an economic theory suggesting that when a government increases debt to fund spending, people anticipate future tax increases to pay off that debt. As a result, individuals save more now, believing they will eventually need to cover higher taxes. Essentially, people adjust their behavior based on their expectations of future government actions, rendering fiscal policy less effective. The theory implies that government borrowing does not influence overall demand in the economy, as consumers adjust their savings in anticipation of future obligations.