Does raising taxes and cutting government spending reduce a
government’s deficits and thus debt? Confine consideration to more tax revenue
and less spent and the theoretical answer is yes; it being a simple matter of
mathematics. Include the impacts of raising taxes and cutting spending and the
answer become far less straightforward. More paid in tax means less disposable
income, which means less consumption and thus less produced (i.e., GNP). A
government spending less also means less consumption in the economy, and
therefore even less to be produced to meet demand. In short, austerity is
recessionary. Whether the ratios of deficit and debt to GDP increase depends on
how much the numerators drop relative to the decrease in GDP. We can look at
the E.U. for some empirical evidence.
The full essay is at "Essays on the E.U. Political Economy," available at Amazon.