The Viability of Budget Deficit Reduction
March 30, 2022
This year’s federal deficit is likely to exceed $2.8 trillion (cbo.gov). What would happen to the deficit if spending were reduced by $1.4 trillion, in an attempt to halve the deficit?
The answer is unknown and probably unknowable. Why? Because government spending is also income for the recipient of that spending, contributing to GDP (and in turn to government tax revenue).
$1.4 trillion of spending corresponds to 5.83% of the current ~$24 trillion GDP. That spending reduction would diminish GDP by at least $1.4 trillion. Due to multiplier effects, the reduction in GDP could be far greater. Such a GDP decline would almost certainly trigger a deep recession, the further impact of which is unknowable in scale.
Therefore, spending will not be reduced—indeed, it is likely to be increased.
This post was also published on Twitter/X . Click to see this post: 
Confidentiality Notice: This post, and any attachments, contains information that is, or may be confidential or proprietary in nature. If you are not the intended recipient, please be advised that you are legally prohibited from retaining, using, copying, distributing, or otherwise disclosing this information in any manner. Furthermore, this communication is for informational purposes only and nothing herein should be construed as a solicitation, recommendation or an offer to buy or sell securities or any product.
© 2023 Horizon Kinetics LLC ®. All rights reserved.