The Anti-Stimulus: Budget Cuts are Worse for the Economy than Tax Increases During Recessions
By Phineas Baxandall, Senior Policy Analyst
Anyone concerned about Massachusetts’ economic recovery should be worried about state and municipal budget cuts. This is not the time for austerity. Relying on cuts to balance the state budget is the surest way to worsen a recession because it will cause economic problems to spiral.
Cuts to public spending would lengthen an oncoming recession, as it would take money out of our local economy that would otherwise recirculate and spur economic activity. Furloughing public employees, cutting state contracts to businesses and nonprofits, and reducing assistance to municipalities and low-income families will take money out of the Massachusetts economy, prolonging and deepening the recession.
Avoiding budget cuts through targeted tax increases is the best way to build a strong recovery in Massachusetts. The pandemic and the resulting economic downturn have caused a sharp fall in tax revenues. Expectations are that the state budget will fall billions short of anticipated revenues for the Fiscal Year 2021 budget, beginning this July.
The federal government can and should directly help states, and the Commonwealth should judiciously draw on its $3.5 billion Rainy Day Fund. But make no mistake, the pandemic and its recession will force difficult choices for policymakers. When we face the choice between budget cuts and tax increases, tax increases are the better choice, especially when targeted to high-income filers and profitable businesses.
Cutting spending dampens private economic activity more than higher taxes. While raising taxes can reduce spending, it does this less than cutting government spending, especially during a recession. This is because a significant portion of dollars collected in additional taxes, particularly from high-income individuals and profitable corporations, otherwise would have gone to savings, trust funds, stock buybacks, or investments in other states or countries.
Instead, we can and should invest these dollars in people. Investing in the public good means dollars would be consumed in-state and recirculated through communities and local businesses. Getting to economic recovery is also going to require combating the pandemic with new investments such as in public health, safety net programs, and making social distancing possible. Even before considering the long list of new pandemic-related needs for public investment, there is a large gap that needs to be closed.
We can get through this recession with our values intact. We can invest in our people and reduce the disparities that separate us. But those who value economic growth should be cheering for tax increases to prevent budget cuts that would cause further harm.