Government Spending or Tax Reduction: Which Might Add More Stimulus to the Economy? (CRS Report for Congress)
| Release Date |
Revised Dec. 9, 2008 |
| Report Number |
RS21136 |
| Report Type |
Report |
| Authors |
Marc Labonte, Specialist in Macroeconomic Policy |
| Source Agency |
Congressional Research Service |
| Older Revisions |
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Summary:
Some policymakers have called for another "stimulus" package to boost economic activity in response to the recession that began in December 2007. A fundamental difference between stimulus proposals is how much of the stimulus should be composed of government spending and how much should be composed of tax cuts. This report considers that issue in the context of conventional economic analysis. It first identifies any policy measure that increases the budget deficit (or reduces a surplus) and is not entirely saved by the recipient as "stimulative" if the economy is operating below its full potential. It then separates the short-run effects of a budget deficit from the long-run effects. In this context, certain spending measures would be more stimulative than certain tax reductions in the short run because they result in a bigger boost in aggregate spending. This advantage may come at the cost of forgone growth in the long run, however. This report will be updated as events warrant.
