Here’s an old, but still valid post:
Lots and lots of papers* have now studied this question and the evidence is rather clear: the types of austerity that are most-likely to a) cut the debt and b) not kill the economy are those that are heavily weighted toward spending reductions and not tax increases. I am aware of not one study that found the opposite. In fact, we know more. The most successful reforms are those that go after the most politically sensitive items: government employment and entitlement programs. Lastly, there is evidence that markets react positively when politicians signal their seriousness by going against their partisan inclinations. In other words, the most credible spending reductions are those that are undertaken by left-of-center governments. So slash away, Mr. Obama!
My emphasis. But don’t hold your breath on that one.
It’s strange to use the word austerity in reference to tax increases, but it happens all the time. Perhaps people are confusing austerity with “bad news for left wingers”.
From where I sit, it is easily possible to use spending cuts to get revenue increases. As a small business owner, I say get rid of a boatload of stupid counterproductive regulations and I will start making more money. When I start making more money, I will be paying more taxes and hiring people that pay more taxes. In the process, the fired regulators can find real jobs that produce real value or starve, either of which serves as an effective spending cut that stimulates the economy.
In a rational world, this country could be out of debt and more prosperous than ever in ten years. The unpopular tool required is called freedom.
“Austerity” to mean “tax increase” is Orwellian doubletalk, brought to you by the spinmeisters of Europe.
However, we can also look at Europe to prove the point that budget balancing by cutting alone doesn’t harm the economy. Take a look at Estonia; they fixed their crisis with cuts, and their economy is growing now – better than any other country in Europe.
Actually, I think it is possible for spending cuts to hurt an economy. The problem is of who decides where the cuts are applied. The “civil service” bureaucrats do the deciding, in just about all cases; so any cuts are applied to frontline services and infrastructure spending FIRST. The ‘crats are always the last to suffer.
Road and bridge maintenance, street lighting, water systems… All these suffer while the swivel-chair mafia keep their jobs.
I have a good local example of this. My town decided cuts needed to be made in the local government budget. Someone I know somewhat (he is married to an ex-employee of mine) happened to work for a council department whose function was to repair and maintain council-owned houses; whether one thinks there should be any such is rather beside the point. Half that department was made redundant a couple of years ago; not a single paper-pusher lost his job.