Barrow a Ricardo's proposition of equivalence

Answer: the Barro I Ricardo Equivalence Proposition is a theory proposed by the British economist Ricardo Ricardo and reformulated by the neoclassical scholar Barro in the light of rational expectations. The theory suggests that, given a certain amount of government spending, the effects of a government resorting to taxation or issuing public debt to finance the government are the same. The idea behind the Barro I Ricardo equivalence proposition is that the government budget is assumed to be balanced initially. The government implements tax cuts in an attempt to increase private sector and public spending and expand aggregate demand, but the tax cuts lead to a fiscal deficit. If the government issues bonds to cover the deficit, since at some point in the future, the government will have to raise taxes in order to pay off the debt and the accumulated interest. Forward-thinking consumers know that government borrowing today means higher taxes in the future. Tax cuts financed with government debt do not reduce the tax burden; they merely reschedule taxes. Therefore, such a policy does not incentivize consumers to spend more. According to this rationale, the additional public debt issued by the government as a result of the tax cuts would be taken into account by people as potential future taxes in the overall budget constraint, and in the absence of a liquidity constraint, the present value of the public debt and the potential taxes would be equal. In this way, the two budget constraints before and after the change are essentially the same, and thus do not affect people's consumption and investment.