Spending Cuts Win out over Tax Increases in International Experience

Washington, DC, July 29, 2011—With the White House and Congress currently embroiled in a debate over how to reduce the nation’s deficit and debt, the experience of other countries can provide helpful evidence about the most effective methods for budget reform. Countries that have faced similar financial situations have found that deficit reduction plans based on spending cuts rather than tax increases are far more likely to succeed, according to a new analysis by the Tax Foundation.

“The most successful reform efforts put all spending programs on the table, not a select few programs,” said Tax Foundation economist David S. Logan. “But contrary to the conventional wisdom in the U.S., the international experience indicates that pairing spending cuts with tax cuts can produce meaningful deficit reduction and improved economic performance.”

In successful reform efforts, reducing expenditures accounted for approximately 80 percent of the improvement in the deficit.  By contrast, deficit/debt reduction attempts driven by tax increases typically failed to correct imbalances and slowed economic growth.

Both Sweden and the United Kingdom faced the need for government budget reform in the early 1990s, and both efforts underscored the success of a strategy based on spending cuts. As of 1993, Sweden’s public expenditures had increased to an intimidating 73% of GDP while public debt stood at 70%.  Between 1993 and 2000, transfers, subsidies, government consumption, and pensions were reduced by an average of 3.3 percent of GDP.  These cuts facilitated double-digit decreases in government spending and public debt, as well as double-digit improvements in the deficit.

“Perhaps the most dramatic result of the literature is that the most successful deficit reduction plans have been based off of not just spending cuts but tax decreases as well,” said Logan. “Pro-growth strategies have seen consistently better results around the world, as countries have reduced the tax burden on the private sector and brought public expenditures into line with available revenues.”

Tax Foundation Fiscal Fact No. 278, “The Proper Role of Taxes in Deficit and Debt Reduction” by David S. Logan, is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.