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Wed Dec 5, 2012, 02:44 PM

Wonkblog: IMF: Budget cuts hurt growth a lot. But tax increases barely matter.

Take note, Boehner! Emphasis mine.

IMF: Budget cuts hurt growth a lot. But tax increases barely matter.

Posted by Howard Schneider on December 5, 2012 at 12:31 pm

A new study (pdf) by the International Monetary Fund raises a further warning flag for fiscal cliff negotiators in the U.S. In what it bills as the first-ever study of its kind, the fund analyzed decades of data on the world’s major industrialized countries to estimate how changes in government spending or revenue affect economic output.

The news isn’t good. Given current circumstances, with a U.S. economy that is growing but still trying to make up lost ground from the 2008 crisis, a one dollar change in government spending could knock as much as $1.80 in output from the economy – what fund researchers called a “statistically significant…and sizeable” outcome.

One brighter spot that could also influence negotiators: the growth impact of a tax hike is estimated to be negligible. The list of measures that automatically become law absent an agreement include both spending reductions and tax increases. While the spending cuts would comprise a heavy drag on growth, the fund paper suggests that a one percent rise in tax revenue would knock just 0.1 percent from gross domestic product.



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