BUDGET BALANCE THROUGH REVENUE OR SPENDING ADJUSTMENTS - SOME HISTORICAL EVIDENCE FOR THE UNITED-STATES

The paper provides a historical perspective on the issue of whether budget deficits are typically eliminated by increased taxes or by reduced spending. By examining U.S. budget data from 1792-1988, I conclude that about 50-65% of all deficits due to tax cuts and about 65-70% of all deficits due to higher government spending have been eliminated by subsequent spending cuts, while the remainder was eliminated by subsequent tax increases. In contrast to previous studies, the empirical analysis uses error-correction models in a way that the intertemporal budget constraint is imposed in the estimation stage. © 1991.