THE DIFFERENT CROWD OUT EFFECTS OF TAX CUT AND SPENDING DEFICITS

Government deficits financed by domestic borrowing were found to crowd out private borrowing and spending by consumers and businesses, in both recession and non-recession periods. Deficits due to tax cuts had a net negative effect on GDP, because stimulus effects are smaller than the crowd out effects. Spending deficits had a zero net impact. This study provides first time econometric evidence that crowd out effects prevail during recessions, and that spending and tax cut deficits have different effects. International borrowing avoids the crowd out problem caused by national deficits by augmenting, rather than taking from, domestic saving.