dominant in Western governments after the Second World War, the primary
aim of fiscal policy was to produce balanced budgets, to ensure that govern-
ment revenue raised by taxation more or less exactly balanced government
expenditure. Keynesian economics, which is primarily fiscal, argued instead
that deficits should be intentionally created at times of economic depression.
If the government receives less in tax than it needs it has to finance
expenditure in part by borrowing, which injects new demand into the
economy, hopefully increasing consumption and reviving production and
therefore employment. If the economy gets over heated and inflation starts to
rise, taxes should be increased. This has two effects: higher taxes mean less
spending power, lower demand and thus less inflation. At the same time the
borrowing needed to cover government expenditure declines, thus reducing
injection of consumption power into the economy and bringing demand yet
further down. Because predictions of what is going to happen in the
economy never turn out to be entirely correct, fiscal policy can easily go
adrift, and by the mid-1970s economists and government policy-makers
moved steadily away from fiscal policy as a primary tool of economic
management in favour ofmonetaristpolicies. However, member states of
theEuropean Unionwho have entered the single currency now no longer
have the freedom to set interest rates independently, which some believe may
force a return to fiscal policy for economic fine tuning. In practice many
other countries, notably the United States of America, have never had
political control over interest rates, but neither have they made extensive
use of fiscal policy. Where it is important is in situations like the United
Kingdom in the late 1990s and early 2000s, where the government inten-
tionally followed the rather old conception of fiscal orthodoxy and refused to
allow public expenditure to rise above the income from tax or to increase
revenue from direct taxation.
Flexible Response
Flexible response is a strategic doctrine which holds that, in a serious war
situation, a whole range of possible defensive and offensive strategies should be
available, so thatescalationneed not proceed too rapidly. It is principally
opposed to the doctrine ofmassive retaliationthat was the mainstay of US
defence thinking at the beginning of the nuclear age. The main point of the
doctrine is that a country or alliance should be able to meet an attack with
increasing but highly specific degrees of force, working gradually up, if
necessary, by clear stages to an all-out missile attack against cities. The doctrine
calls for subtle targeting and accurate weapons-delivery systems to avoid the
need for massive retaliation. It has, nevertheless, been criticized on the grounds
Flexible Response