Large Changes In Fiscal Policy: Taxes Versus Spending

This paper by Alberto Alesina and Silvia Ardagna provides very good empirical research to confirm that what we expect a priori: that deficit cutting sets up a strong recovery, while deficit spending funded by tax increases does not. The abstract nicely summarises other aspects of the paper, and it is worthwhile for anyone to read who is involved or interested in public policy.

We examine the evidence on episodes of large stances in fiscal policy, both in cases of fiscal stimuli and in that of fiscal adjustments in OECD countries from 1970 to 2007. Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions. We confirm these results with simple regression analysis.

H/T to Sean Corrigan.