NCPA - National Center for Policy Analysis

Reining-In Government Spending is Key to Economic Growth

May 2, 2003

The Congressional Budget Office (CBO) recently released an economic or dynamic scoring of President George W. Bush's proposed 2004 budget. The most important aspect of this analysis is simply its existence, since the CBO has long claimed that dynamic scoring would be impossible to implement. The two key findings of the CBO analysis are:

  • The economic growth proposals in the budget create approximately a million jobs per year for the first five years.
  • However, government spending will overwhelm many of the positive effects of lower tax rates.

The CBO's two main economic simulations show that President Bush's tax relief proposals recover a significant portion of the reduced revenue. The CBO's use of the Global Insight (GI) model of the U.S. economy shows the president's budget aiding the economy enough to recover two-thirds of the reduced tax revenue. The Macroeconomic Advisers (MA) simulation, another model of the U.S. economy, shows recovery of over one-third of the lost tax revenues.

These estimates of revenue recovery stem mostly from new jobs and increased economic growth. The GI model estimates that economic growth from 2004 to 2008 would average 1.4 percent higher than the baseline level, while the MA model estimates a 0.2 percent boost.

Employment levels would jump under both simulations:

  • 1.6 million more jobs per year (a 1.2 percent increase), based on the Global Insight model.
  • 550,000 more jobs per year (a 0.4 percent increase), based on the Macroeconomic Advisers model.

The CBO assumes that the negative effects of government spending would overwhelm the positive effects of lower taxes. In other words, government spending frequently crowds out additional investment and employment, negating most of the positive investment incentives proposed by President Bush to help the economy.

The lesson is clear, say analysts: Maximizing the success of pro-growth tax cuts requires restraining federal spending.

Source: Brian M. Riedl, "CBO Estimates: Spending Weakens the Effects of Pro-Growth Tax Relief," Backgrounder No. 1644, April 9, 2003, Heritage Foundation.

 

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