In the year 2009, the world experienced a recession that saw many people lose their jobs. This prompted the world governments to act quickly to save the sliding economies of many nations. The US government introduced tax cuts and government spending provisions to tackle the crisis. Tax cuts are effective; this is because they encourage more economic activity. This not only increases the tax base but is also very essential in resurrecting the economy, because it gives household incentive to spend more. On the other hand government spending impacts on the demand in the short run. However government spending programs take more time to establish unlike tax cuts. The debate still ranges on. There are those who think tax cuts are more effective than increasing government spending and vice versa.
Tax cuts in relation to government spending are easy to set up and implement. This is why some economists would rather go with tax cuts than increasing government spending. Tax cuts have the effect of reducing government revenue and lowering the burden to the people or corporations who have been exmpted.Idealy tax cuts forces the government to reduce its expenditure, but enables the tax payers to spend more by purchasing more commodities. This improves the welfare of the people. Tax cuts also encourage investment which in turn stimulates the economy. However tax cut do not necessarily imply taxpayers spend more in reality. This is because with the extra income in their hands, no one knows what they could use it for, or where they may choose to spend it. This impact negatively on tax cuts. This is because, when the government gives tax cuts, it is expected that the people will increase their purchasing power and purchase commodities within the borders of the nation.
Government spending is another solution to solving a crisis like the recession. Government spending can be financed from taxes or government borrowing either internally or internationally. Increase in government spending results to more borrowing; this has the effect of reducing the money available in supply.Idealy government spending raise demand which in turn increases consumption. Increased consumption results to increased production, which has the effect of creating more jobs for the people. This raises the welfare of the people. However in reality increasing government spending means depriving the private sector of resources and giving them to the public sector. Note that the private sector is more efficient and productive than the public sector.
Deficit spending means increasing government borrowing. Increased borrowing results to high interest rates, because when the government sells bonds it increases the rates to attract investors. Also increased borrowing reduces the private sector. This is not good because the private sector is more productive than the public sector. Increased borrowing may result to inflation as it increases the money in supply. Another problem is that, for the government to finance the deficit, it must increase taxes or reduce its expenditure. If the taxes are increased then, this may impact negatively on the purchasing power of the nation and may cause reduced incentives to work.
To reduce the budget deficit, some government expenditures must be reduced. For instance the US should reduce its involvement in the many war missions in other countries. The deployment of troops in foreign countries costs a lot not only to the government but to the families of the soldiers. The insurance rates rise than reducing the purchasing power of the people. There should be legislation in place to curb the huge bonuses taken by executives of corporations, for instance AIG and General motors.
Looking at all the arguments above, both tax cuts and government spending are sure ways of intervention by the government on a sliding economy. But tax cuts are more effective in the long run than government spending. Unlike tax cuts government spending is a short term solution which takes longer to implement. We need long-term solutions rather than short term solutions. A tax cut stimulates the much needed economic activity. Since this is a free market, we cannot restrict the people on where to buy from or the manner in which they spend the money they have. This ensures satisfaction and independence of the people, and in turn increases the welfare of the nation.