by Mitch Kokai
Senior Political Analyst, John Locke Foundation
That headline should make sense to most people who read this forum regularly. For those who require more proof, consider a recent report from Salim Furth of the Heritage Foundation. Furth explains how spending cuts would have been better than recent tax increases in helping to boost the American economy.
Several tax increases took effect in January 2013: new Obamacare taxes, the expiration of the payroll tax, and “fiscal cliff” tax increases. During the fiscal year (which ended on September 30), those together increased taxes by $188 billion.
The spending cuts (i.e., sequestration) took effect in March 2013. Sequestration reduced fiscal year (FY) 2013 budget authority by $85 billion, but only $42 billion of the cuts took effect during FY 2013. When considering the economic effects of spending cuts, there are good arguments for considering either the budget authority or the outlay; I report budget authority.
In addition to immediate economic costs, deficit reduction has benefits, most of which are felt in the long term. When deficit reduction is undertaken through spending cuts, it frees up human resources and capital for private-sector growth. Though the transition is not immediate, the costs of spending cuts are relatively brief and mild, and the benefits remain in the long term.
In addition, successful deficit reduction lowers the ratio of debt to gross domestic product (GDP), keeping interest payments down and allowing stronger economic growth. For the U.S., deficit reduction should be a major priority over the next 10 years: The retirement of the baby-boom generation will add to the government’s costs and shrink the tax base. …
… [W]hat if the payroll, Obamacare, and fiscal cliff tax increases had been replaced with immediate spending cuts in the same amount? Table 2 shows that there would be significantly higher output and job creation. And what we know about longer-term growth tells us that the gains would be even greater over time.