To Starve or Not to Starve the Beast?

IMF Working Papers, September 1, 2010

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For thirty years prominent voices have advocated a policy of starving the beast cutting taxes to force government spending cuts.
This paper analyzes the macroeconomic and welfare consequences of this policy using a two-country general equilibrium model.
Under several strong assumptions the policy, if fully implemented, produces domestic output and welfare gains accompanied by losses elsewhere.
Negative effects can easily arise in the presence of longer policy implementation lags, utility-enhancing government spending, and productive government capital.
Overall, the analysis finds no support for the idea that starving the beast is a foolproof way towards higher output and welfare.

Two-country general equilibrium model.
Investigates macroeconomic and welfare consequences of tax cuts intended to force government spending cuts.
Explores sensitivity to implementation lags, the utility role of government spending, and the productivity of government capital.

Under several strong assumptions and if fully implemented:
- The policy produces domestic output gains.
- The policy produces domestic welfare gains.
- These domestic gains are accompanied by losses elsewhere.
Conditions that can produce negative effects:
- Longer policy implementation lags.
- Utility-enhancing government spending.
- Productive government capital.
Overall conclusion: no support for starving the beast as a foolproof path to higher output and welfare.

Policymakers should not view tax cuts designed to force spending cuts as guaranteed to raise output and welfare.
Consideration of implementation lags is critical when designing fiscal strategies.
The role of government spending in household utility and the productivity of government capital must be taken into account before endorsing starve-the-beast policies.