Fiscal consolidation strategy: An update for the budget reform proposal of march 2013

  • Recently, we evaluated a fiscal consolidation strategy for the United States that would bring the government budget into balance by gradually reducing government spending relative to GDP to the ratio that prevailed prior to the crisis (Cogan et al, JEDC 2013). Specifically, we published an analysis of the macroeconomic consequences of the 2013 Budget Resolution that was passed by the U.S. House of Representatives in March 2012. In this note, we provide an update of our research that evaluates this year’s budget reform proposal that is to be discussed and voted on in the House of Representative in March 2013. Contrary to the views voiced by critics of fiscal consolidation, we show that such a reduction in government purchases and transfer payments can increase GDP immediately and permanently relative to a policy without spending restraint. Our research makes use of a modern structural model of the economy that incorporates the long-standing essential features of economics: opportunity costs, efficiency, foresight and incentives. GDP rises because households take into account that spending restraint helps avoid future increases in tax rates. Lower taxes imply less distorted incentives for work, investment and production relative to a scenario without fiscal consolidation and lead to higher growth.

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Metadaten
Author:John F. Cogan, John B. TaylorGND, Volker WielandORCiDGND, Maik Hendrik WoltersORCiDGND
URN:urn:nbn:de:hebis:30:3-297149
URL:http://www.imfs-frankfurt.de/fileadmin/user_upload/pdf/IMFS_WP_68.pdf
Parent Title (German):Working paper series / Institute for Monetary and Financial Stability ; 68
Series (Serial Number):Working paper series / Institute for Monetary and Financial Stability (68)
Publisher:Goethe-Univ., House of Finance, Inst. for Monetary and Financial Stability
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Date of Publication (online):2013/03/18
Date of first Publication:2013/03/18
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2013/04/17
Page Number:14
HeBIS-PPN:337766258
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Institute for Monetary and Financial Stability (IMFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht