A study by the American Enterprise Institute for Policy Research (AEI) expands on data from Harvard economists to empirically prove that nations in a bleak budget deficit situation have successfully consolidated and balanced the budget by cutting spending. This study reports that only a few countries were successful in balancing the budget and an overwhelming majority of those relied almost exclusively on spending cuts as opposed to tax increases.
Countries that primarily raised taxes failed to achieve a balanced budget. While countries relying at least 85 percent on spending cuts to balance their budget were successful in their efforts. “Tax increases play little role in successful efforts to balance budgets,” the study states. For instance, Finland cut spending by 108 percent in the late 1990s and also moderately decreased taxes to eliminate the budget deficit. The success is largely due to the fact that increased government spending is generally the problem in the first place.
In the United States, budget deficits have continued to increase while the GDP and tax revenues are comparable to historic norms. The culprit is wildly high and unrestrained government spending resulting in the strain on budget and creation of deficits and debt. The clear solution is not to raise taxes but to reduce the spending and fix the cause of the problem.
Furthermore, an equal split between raising taxes and cutting spending was a failing idea. The average split for an unsuccessful consolidation attempt was 53 percent tax increase and a 47 percent cut to government spending. These failed cases represent an attempt to close a budget gap caused by an over-spending problem by raising taxes.
The report continues to outline how, when cutting government expenditures, the most successful formula for budget deficit reduction came as a spending cut in two main areas: social entitlements and reduction in the size and compensation of the government work force. The reasoning here is that a reduction in entitlements “spurs people to work and save.” Additionally, cutting size and compensation of the government work force expands the much more productive private sector.
Overall, a government who takes on a failing budget and cuts spending to balance it will likely see an improved credibility for the economy as well. Demonstrating a commitment to fiscal responsibility to citizens and financial markets is a deciding factor encouraging future economic growth.