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Budget Balance, Welfare, and the Growth Rate: "Dynamic Scoring" of the Long-Run Government Budget

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  • Bruce, Neil
  • Turnovsky, Stephen J

Abstract

This paper determines conditions under which a reduction in the role of government, either through a tax cut alone, or together with accompanying expenditure cuts, will improve long-run government fiscal balance. For a ceteris paribus cut in the income tax rate to improve long-run government balance, the intertemporal elasticity of substitution must exceed unity. A tax cut balanced by an expenditure cut is likely to improve the long-run balance even if it does not improve the short-run balance. The relationship between improving the long-run fiscal balance and economic welfare is also analyzed.

Suggested Citation

  • Bruce, Neil & Turnovsky, Stephen J, 1999. "Budget Balance, Welfare, and the Growth Rate: "Dynamic Scoring" of the Long-Run Government Budget," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(2), pages 162-186, May.
    • Handle: RePEc:mcb:jmoncb:v:31:y:1999:i:2:p:162-86
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