Fiscal policy is not a one-way street and changes in it happen in a variety of areas. Therefore, the relationship between fiscal policy and inflation is not clearly established in the literature.

Both empirically and conceptually, inflation is the result of a nexus of monetary and real variables. In sum, inflation can be lowered by several factors: by (1) monetary deceleration, (2) an increase in the demand for money, (3) productivity growth, and (4) monetary appreciation (although this one is in a sense a derivative of 2 and 3).

The first factor assumes that the expansion of money and credit in the economy decreases. These variables are primarily dominated by monetary policy.

In the second factor, an increase in the demand for money implies a situation where money in the economy goes to people who are less inclined to spend it.

And the third factor, productivity, would mean a situation in which the economy increases its supply capacity, for example, as a result of an increased propensity to invest. The new fiscal contribution would have the effect of improving the investment climate, e.g. as a result of an expected increase in revenues or potential profits.

It seems, therefore, that the theoretically most likely anti-inflationary effect of higher taxes could come from the first factor, i.e. a counterfactual reduction in the monetisation of debt for the state budget.

But even in this scenario, it must be stressed that the reason why taxes reduce inflation is not directly due to the positive effect of taxes on reducing inflation, but to the positive effect of reducing the printing press.

Simply increasing taxes generally has a neutral or negative effect on the need to reduce current inflation. And the same happens in principle in the long term. Inflation is best defeated by increases in productivity, multiplication of savings, accumulation and inflow of capital, and by stopping causing inflation.

Mateusz Machaj, Ph.D., Professor of Economics, University of Wrocław order