The Cost of Inaction: Why cutting spending will boost recovery, even in the short term

Apr 1, 2010

Much of the media commentary around the deficit is informed by a crude and out of date view that higher borrowing will always and everywhere have a stimulatory effect on the economy. In fact a large body of economic evidence has accumulated in recent decades that reducing government borrowing leads to higher growth, at least in situations where borrowing is high.

We argue that, since consolidations based on tax rises often fail, resulting in large falls in output in the short-term and rises (not falls) in deficits, whilst those based on spending cuts are most likely to be successful, it is very important to signal, early and credibly, that the consolidation will be largely spending-cuts-based.

Author

Ed Holmes

Ed Holmes
Senior Research Fellow for Economics & Social Policy, 2009-2013 Read Full Bio

Hiba Sameen

Hiba Sameen
Economics Research Fellow, 2009-2011 Read Full Bio

Dr Andrew Lilico

Dr Andrew Lilico
Chief Economist, 2009-2010 Read Full Bio
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