The unique characteristics of the fiscal policy in Israel that created one of the largest public sectors assumed many similarities to the characteristics described in the economic literature as related to non-Keynesian effects. The results point indeed to significant asymmetrical negative effect of public consumption on product in Israel that exists even in minor fiscal changes and has long-term effects. Against this background emerges the possibility of considerable unutilized potential growth in Israel, which can be realized by means of drastic contraction of public spending and of tax burden to proportions acceptable in the West.

In the economic literature, three different approaches are described to portray the effects of fiscal corrections. The first is the traditional Keynesian theory, according to which fiscal expansion will increase the product in the short term. The second is the neoclassical theory according to which fiscal corrections do not influence the product, and that is determined mainly by the aggregate supply. The third approach, which attacks the Keynesians for neglecting the role of expectations, is an outcome of a number of significant fiscal corrections which occurred in Europe during the 1980s and 1990s and created unique non-Keynesian effects.

The first event occurred during 1983-1986 in Denmark, which made significant cutbacks in the budget deficit by raising taxes and decreasing the government investment. The second event occurred during 1987-1989 in Ireland, which also made a significant cutback in the budget deficit by focusing on reduction of budgetary spending, especially social welfare transfer payments and public-sector wage payments. In both events, a surprising increase occurred in economic activity and product (mainly an increase in private consumption and also in private investment). This is contrary to what is expected according to the Keynesian theory. The third event occurred in Sweden during 1991-1992 in which fiscal expansion led surprisingly to a sharp decrease in economic activity and product. In parallel, the dramatic fiscal expansion in Japan both by means of increase of government investment and decrease in taxes during the last decade, which did not contribute to an increase of economic activity, must be noted.

Public Finance journal, Non-Keynesian Effects, Public Consumption, Traditional Keynesian Theory, Neoclassical Theory, Social Welfare Transfer Payments, European Central Bank, Public Sector Wages, Gross Domestic Product, GDP, Stabilization Programs, Error Correction Model, Technological Development.