As Congress brings the United States closer to the brink of the so-called “fiscal cliff,” the package of automatic spending cuts and tax increases that will take effect at the end of the year, yet another report has found that the spending cuts pose a major threat to economic growth, while small revenue increases won’t.
The study, from the International Monetary Fund, found that the negative impact of spending cuts during economic downturns in the United States are “statistically significant and sizeable,” while the impact of new revenues is “very small and not significantly significant.”
For each dollar of spending cuts during an economic downturn, the IMF found, the United States could lose as much as $1.80 in economic activity. A one percent rise in revenues, meanwhile, would shave just 0.1 percent of growth from the nation’s gross domestic product (the left side represents the effect of spending cuts; the right, tax increases):
President Obama proposed a plan last week that would raise $1.6 trillion in new revenues through the expiration of the high-income Bush tax cuts and other tax increases on wealthy earners. Two other nonpartisan reports, one each from the Congressional Budget Office and Congressional Research Service, have found that the economic impact of tax increases on the wealthy would be negligible. Obama’s plan also includes billions of dollars of investment into infrastructure and jobs programs to help spark growth and offset the negative effects of spending cuts.
Despite these findings, Republicans have clung to the idea that tax increases on wealthy earners will derail the economic recovery while spending cuts and deficit reduction will speed it up. The IMF study, in addition to the double-dip recession austerity has caused in Europe, shows that reality is the exact opposite.