A report from the International Monetary Fund cautions that hard-and-fast cuts across multiple economies will damage growth and impair the ability of Western countries to recover. Based on 30 years of data the IMF concludes:
“Our findings suggest that in today’s environment, fiscal consolidation is likely to have more negative short-term effects than usual and if many countries adjust simultaneously, the output costs are likely to be greater”.
Furthermore in the chapter titled “Will It Hurt? Macroeconomic Effects of Fiscal Consolidation,” the authors find that within two years of cutting the budget deficit by 1 percent of GDP, domestic demand—consumption and investment—is about 1 percent lower, and the unemployment rate is about ? percentage point higher. Because net exports––exports minus imports––tend to rise when budget deficits are cut, the overall impact on GDP is a decline of ½ percent.
Listen up George…