The surge in global growth gives countries the perfect opportunity to cut their debt burdens – and they should do it by cutting spending rather than by raising taxes, before the economy slows down again and the debt burden becomes tougher to bear.
“Countries take a smaller hit to growth if they cut spending – including for entitlement programs – than if they raise taxes. In fact, the latter can be self-defeating, leading to even higher debt and lower growth,” said Camilla Lund Andersen, editor of the IMF magazine.
Sadly in NZ we have a Government that looks like it wants to massively hike the take take, despite the books being in surplus.
Studying a range of deficit-cutting programmes, the economists found spending cuts of 1pc of GDP hit economic growth by 0.5 percentage points relative to the trend rate of growth, with the dent put in growth lasting for less than two years.
If this is done at a time of economic growth it has no negative impact, so the economy grows even at a time of austerity.
By contrast plans based on tax hikes resulted in a two percentage point fall in GDP relative to its previous path.
“This large recessionary effect tends to last several years,” they said.
Increasing taxes reduces economic growth, and hence incomes and jobs.
