Slide 44 of 49
Notes:
What about the affects of this cut in government spending on the deficit?
Again, the affect on the deficit is pretty tricky and depends on quite a few unknowns and educated guesses. It will depend on how much the cut in government spending softens the economy. If the cuts are imposed on an economy with high unemployment and under utilized production capacity, then the government could trigger a recession with its cuts. Increased layoffs and long term unemployment may make additional demands on entitlement programs. If the new demands for government assistance are greater than the savings from previous cuts, the deficit could actually increase.
On the other hand, if the economy is humming along fairly well with low unemployment and fully utilized capacity, moderate cuts in spending may be good medicine to keep the economy from over heating. If cuts in spending are greater than any increase in social program spending and unemployment compensation that may occur due to the spending cuts, the deficit may decrease.
As of August, 1997, the economy is humming along rather nicely. Tax revenues have increased, and spending on social programs has decreased on its own due to low unemployment rates. These two events have resulted in the deficit projections for 1997 to be lowered to $40 to $60 billion. As of August, 1998, the government is reporting budget surpluses. The economy could probably absorb moderate spending cuts at this time.
