Government Spending or Tax Reduction: Which Might Add More Stimulus to the Economy?

Publication Date: January 2003

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

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Abstract:

Members have proposed several "stimulus" measures to help end the recession. A fundamental difference in competing stimulus packages is how much of the stimulus should be devoted to government spending and how much should be devoted to tax cuts.

This report considers that issue in the context of conventional economic analysis. It first identifies any policy change 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 longrun effects. In this context, certain spending proposals may be more stimulative than certain tax reductions in the short run if 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.