Spending Cuts Are Good for the Economy

Alex Adrianson / September 16, 2010

Reducing budget deficits by cutting government spending has a stronger record of economic stimulus than either reducing the deficit with tax increases or increasing government spending. That’s what Harvard economists Albert Alesina and Silvia Ardagna have found in their recent research. They examined 107 instances of large reductions (at least 1.5 percent in one year) in budget deficits as well as 91 instances of large increases (over 1.5 percent in one year) in budget deficits over the past 40 years.

They found that when an economy expands following deficit reduction, spending cuts were the largest part of the adjustment. At the same time, when recessions followed deficit reduction, tax increases were the predominant policy. The authors also found that when budget deficits increased, tax cuts had a more expansionary impact on the economy than spending increases. (more…)