In their latest note, Stephen Jen and Fatih Yilmaz introduce the concept of “fiscal velocity” — a measure of how efficiently government spending translates into GDP growth. Their analysis finds stark differences across regions: Asia’s fiscal spending, concentrated on investment and infrastructure, is far more effective than Europe’s, where large welfare commitments yield little growth.
“On this measure, roughly speaking, Asian countries’ fiscal spending may be 7 times more efficient than that in European countries.” — Stephen Jen and Fatih Yilmaz, September 15, 2025
The note highlights how excessive debt servicing in countries such as Japan and Italy depresses fiscal velocity, while an “Alt-Keynesian” culture in developed economies — doing more for the sake of doing more — has left a legacy of high deficits with modest growth impact. Over time, the effectiveness of fiscal spending has deteriorated further, with recent fiscal outlays fuelling inflation more than real economic activity.
The findings point to a broader theme: fiscal dominance is increasingly eroding central bank independence, as public spending crowds out private demand for credit and pressures rates higher.
Table of Contents
- Summary
- Correlation not necessarily causality
- Role of government big in Europe but not too effective, compared to Asia
- Investment versus consumption spending
- Excessively proactive fiscal and monetary policies
- Debt rollover and debt servicing
- A general deteriorating trend over time
- Japan
- Bottom line
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