By J. O. N. Perkins (auth.)
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Extra info for Budget Deficits and Macroeconomic Policy
These results therefore imply that in choosing a fiscal instrument of expansion (or one to reduce its budget deficit) a government ought to consider whether it is interested mainly in the effects of the various instruments over three years or over five years; and whether it is interested mainly in their relative effects on the level of real GDP or its rate of growth. 29) Source: Derived from Dramais (1986). 6, however, that over the first year, or the first two years, government investment or consumption (the two not being differentiated in this simulation) has a markedly greater effect on real GDP than any of the forms of tax cut.
It is therefore clear that public sector investment has, on thesefigures,by thefifthyear, an appreciably greater effect on output than does government consumption spending, and much the same effect as a change in direct taxation (here including employers' social security contributions). The argument (made by Knoester in various publications) that a balanced budget reduction is expansionary in terms of its effect on production thus depends (according to these figures) partly on what types of public expenditure are cut.
Presumably the relative importance of the principal tax changes assumed in the simulations is similar to the proportions of these various taxes for the OECD as a whole. But this still leaves open the question whether tax changes of a similar order concentrated in particular types of (direct) taxation would or would not have similar effects. At any rate, so long as it is true that particular types of tax increase have bigger relative effects on the macroeconomic target in question than do others, it must be possible to find some ways of increasing taxation by a given amount that will have different relative effects on real output from others.