Budget balance, welfare, and the growth rate: "Dynamic scoring" of the long-run government budget

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.