To Starve or Not to Starve the Beast?

37 Pages Posted: 1 Feb 2011

See all articles by Michael Kumhof

Michael Kumhof

Bank of England

Douglas Laxton

International Monetary Fund (IMF) - Research Department

Daniel Leigh

International Monetary Fund (IMF)

Date Written: September 2010

Abstract

For thirty years prominent voices have advocated a policy of starving the beast cutting taxes to force government spending cuts. This paper analyzes the macroeconomic and welfare consequences of this policy using a two-country general equilibrium model. Under several strong assumptions the policy, if fully implemented, produces domestic output and welfare gains accompanied by losses elsewhere. But negative effects can easily arise in the presence of longer policy implementation lags, utility-enhancing government spending, and productive government capital. Overall, the analysis finds no support for the idea that starving the beast is a foolproof way towards higher output and welfare.

Keywords: Budget deficits, Cross country analysis, Economic models, Fiscal analysis, Fiscal policy, Government expenditures, Tax policy, Tax reductions, United States, Welfare

Suggested Citation

Kumhof, Michael and Laxton, Douglas and Leigh, Daniel, To Starve or Not to Starve the Beast? (September 2010). IMF Working Papers, Vol. , pp. 1-36, 2010. Available at SSRN: https://ssrn.com/abstract=1750687

Michael Kumhof (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Douglas Laxton

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Daniel Leigh

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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