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World desk5 min

Government Spending Cuts vs. Tax Increases: Which Better Reduces Borrowing?

Neither spending cuts nor tax increases always reduce borrowing more. The outcome depends on the budget measure, its economic feedback, starting conditions and whether it is implemented as planned.
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Neither always wins. Spending cuts lower government outlays directly; tax increases raise receipts directly. Which reduces borrowing more depends on the size and design of the measures, their effects on economic activity, the state of the economy, and whether policymakers implement them as announced. The answer also changes depending on whether “borrowing” means the annual deficit in currency terms or the debt-to-GDP ratio.

What does “reducing borrowing” mean?

Governments generally borrow to cover the gap between their spending and revenue over a period. A spending cut can narrow that gap by lowering outlays; a tax increase can narrow it by raising receipts. That first-round arithmetic is not the whole result: economic activity and other budget items may respond, changing the final deficit.

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The annual deficit and the debt-to-GDP ratio are different measures. The deficit is a flow over a period; debt is an accumulated stock, and the debt ratio compares that stock with GDP. A policy can reduce borrowing in currency terms while a fall in GDP makes the debt ratio improve less—or even worsen. So a claim that a measure “worked” needs to specify which outcome it means.

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How do the two approaches compare?

Question Spending cuts Tax increases
First-round budget effect Reduce the affected government outlay. Increase receipts from the affected tax or tax base.
Economic channel Effects depend on what is cut. Government consumption, transfers, and public investment are distinct measures; cuts to consumption have a direct measured-output effect. Effects depend on the tax rate, the tax base, and timing. Different tax changes need not produce the same response.
Who is affected Depends on which services, transfers, or investments change. Depends on the tax and who or what is within its base.
What can weaken the budget result A contraction can reduce receipts or alter other spending, while an announced cut may not be fully implemented. A contraction can reduce receipts or alter other spending; the effect varies with the measure and economic conditions.

The OECD’s 2012 report, Fiscal Consolidation: Part 2. Fiscal Multipliers and Fiscal Consolidations, emphasizes that spending measures have different effects rather than forming one interchangeable category. The IMF’s 2018 synthesis, Alberto Alesina’s “Improving Economic Growth: Cut Spending or Raise Taxes?”, likewise distinguishes spending-led and tax-led adjustments, including the role of transfers.

Why can the final deficit differ from the first-round arithmetic?

When a government tightens fiscal policy, the affected spending or tax change can alter demand and output. If activity falls, tax receipts may also fall, and other budget items may change. The initial saving or revenue increase can therefore be partly offset. The size of that feedback depends on the measure and the conditions in which it is introduced.

The IMF’s 2010 chapter, Will It Hurt? Macroeconomic Effects of Fiscal Consolidation, summarizes historical evidence from advanced economies and simulations using the IMF’s Global Integrated Monetary and Fiscal Model: fiscal consolidation typically reduces output and raises unemployment in the short term. That is a qualified finding about the evidence and model in that chapter, not a guarantee that every consolidation has the same result.

Economic slack matters. IMF material on fiscal multipliers reports that they tend to be larger when output is below potential. In that setting, tightening can have a larger short-run effect on output, making the feedback to the budget more consequential. A measure introduced under different conditions may produce a different result.

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What does historical evidence say about which approach works better?

Some historical comparisons favor spending-led adjustments, but they do not establish a universal ranking. NBER Working Paper 15438, Large Changes in Fiscal Policy: Taxes Versus Spending (2009), summarizes evidence from large OECD fiscal episodes from 1970–2007 in which spending-based adjustments were more likely to reduce deficits and debt ratios. That finding concerns a particular historical sample and outcome; it does not show that every spending cut beats every tax increase.

Later reviews stress that estimated effects vary with the sample, how policy changes are identified, the composition of the measures, economic conditions, and implementation. NBER Working Paper 23385, The Effects of Fiscal Consolidations: Theory and Evidence (2017), separates spending cuts, transfer cuts, and tax increases rather than treating them as a single choice on each side. The IMF’s 2023 review, Fiscal Consolidations: Taking Stock of the Success Factors, Impact, and Design, also notes that announced spending-led plans may be carried out with smaller expenditure reductions than planned and greater reliance on revenue measures. Plans and realized policy can therefore differ.

One IMF working paper offers a specific warning about debt ratios, not a blanket rule about borrowing. Non-Linearities in Fiscal Policy: The Role of Debt (2020) analyzes 13 countries over 1980–2014 and finds that tax-based consolidation was generally self-defeating for the debt-to-GDP ratio when initial debt was high. This is a result from that study’s sample and measure. It does not prove that tax increases always raise nominal borrowing.

An IMF speech, “Fiscal policy in advanced economies: fiscal adjustment, efficiency and growth” (2012), gives a conditional illustration: for advanced countries, a one-percentage-point-of-GDP reduction in discretionary spending leads on average to a 0.7-percentage-point deficit reduction under the stated assumption of a multiplier of 1. That is an assumption-bound estimate, not a guaranteed outcome or a direct comparison with a tax increase.

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What should you check before comparing two proposals?

  • Direct fiscal yield: How much spending would actually be removed, or how much revenue would the tax change raise, and over what period?
  • Measure design: Is the proposal changing government consumption, transfers, public investment, a tax rate, or a tax base? These do not share a single economic channel.
  • Economic conditions: Is output below potential, when fiscal multipliers may be larger, or are conditions different?
  • Starting debt and chosen metric: Is the comparison about annual borrowing, the debt stock, or debt as a share of GDP? Does the analysis account for initial debt?
  • Implementation and durability: Are the changes enacted and sustained, or are announced savings likely to be revised or replaced?
  • Distribution and services: Who pays more, who loses support, and which public services or investments change? A headline budget total does not by itself show these consequences.

The IMF’s 2018 working paper, Macroeconomic Effects of Tax Rate and Base Changes: Evidence from Fiscal Consolidations, describes a narrative dataset covering nearly 2,500 tax measures across 10 OECD countries. That number describes the dataset’s coverage; it is not a count of fiscal consolidations or an estimate of the causal effect of tax increases.

A 2026 IMF working paper, The Fiscal Multipliers, has an abstract reporting a two-year output comparison for one study and noting that evidence for emerging and developing economies is less clear-cut. Those abstract-level details do not, by themselves, establish a general borrowing estimate; the paper’s definitions, sample, and methods matter to interpreting the comparison.

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