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.
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