The report, which examines the behavior of all developed countries between 1970 and 2007, explains in rather simple language that the government’s financial problems do not come from revenue problems so much as they are the result of over-spending. “Clear and convincing empirical evidence proves countries that undertake programs to reduce government budget deficits and stabilize the level of government debt (known as fiscal consolidations) can boost economic growth and job creation in the short term.”
Of the three key findings, the most obvious is perhaps that “Spending cuts work. Tax increases don’t.”
“Countries that lower their debt-to-GDP ratio predominately or entirely through spending cuts are more likely to achieve their goals of government budget deficit reduction and government debt stabilization than debt reduction efforts in which tax increases play a significant role.” [See editorial cartoons about the federal budget and deficit.]
The second key finding is that “Spending cuts can boost the economy in the short term too.”
“While most economists agree that reducing government spending increases economic growth the long term,” the JEC said, “empirical studies have found that reducing government spending can boost economic growth and job creation in the short term as well.” [See a roundup of political cartoons on the economy.]
The third key finding is that “Spending cuts must be credible to realize short-term growth benefits.”
This is an important point that is often over-looked, especially by those who would rather talk about cutting spending than actually do it. Examples of the kind of spending the committee analysts who prepared the report found to be “credible” include reducing the number and compensation of government workers, eliminating agencies and programs, eliminating transfer payments to businesses and reforming and reducing transfer payments to households. [See a slide show of the 10 best cities to find a job.]
All told, the JEC found, “21 times in ten developed countries, governments successfully reduced their debt by 4.5 percentage points or more of GDP within three years. These successes were based predominately or entirely on spending cuts” while “26 times in nine developed countries, reducing debt through spending cuts significantly boosted economic growth in the first three years “with the absence of tax increases being “critical” to the creation of economic growth.
The reason this formula works, said the JEC, is that it reduces expectations of higher taxes and business uncertainty--allowing greater and more productive investment by business in the nation’s economic life. “Since business investment is the main driver of economic growth and job creation, less business investment means slower economic growth and fewer private sector jobs.” It seems simple, no?