Number: RS21136
Title: Government Spending or Tax Reduction: Which Might Add More Stimulus to the Economy?
Authors: Marc Labonte, Specialist in Macroeconomic Policy 
Abstract: Some policymakers have called for a "stimulus" package to boost economic activity in response to the housing downturn. 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 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 long-run effects. In this context, certain spending proposals 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.
Pages: 4
Date: December 9, 2008