Assume that the maximum revenue that can be collected from all taxes, including seigniorage, is 5,000 goods and that the maximum debt is 6,000 goods. The real gross market rate of return is 1.2. Government expenditures currently equal 4,500 goods. The current leaders of the country detest government expenditures but know they will not be in power next period.
How can these leaders use their control over current taxes, subsidies, and the government debt to force their successors to reduce steady-state government expenditures below 4,500 goods? Use the government budget constraint in giving your answer.