Saturday, July 30, 2011

What does a successful fiscal adjustment in the Debt to GBP ratio of a country look like? Harvard’s Alberto Alesina and Silvia Ardagna examined efforts to reduce the debt in OECD nations over the last 40 years, classified them into successful and unsuccessful, and then measured the mix of spending reductions and revenue enhancements in each group. The results look like this:

The results are pretty clear. Unsuccessful attempts to cut debt tended to raise taxes significantly, accompanied by small spending cuts. Successful attempts did so by cutting spending by 2% and cutting taxes.

Veronique de Rugy at Reason adds:
remember that this research is consistent with the work of former Obama Council of Economic Advisers chairman Christina Romer and her economist husband, David Romer, which shows that increasing taxes by 1 percent of GDP for deficit-reduction purposes leads to a 3 percent reduction in GDP.
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