Cutting Red Tape to Cut the Deficit: An Innovative Approach to Balancing the Budget

Abstract

To rein in fiscal deficits, policymakers traditionally raise taxes or cut public spending. However, many economists worry that those policies can slow down the economy. By contrast, faster economic growth — without changing taxes or spending — reduces the deficit on two fronts, by raising revenue and by reducing demand for safety-net public spending. In this policy brief, we argue that boosting economic activity by reducing the regulatory burden works indirectly as a deficit-reducing policy.

This brief offers a pragmatic road-map for reducing the budget deficit through cutting red tape. First, we highlight how boosting productivity performance is critical to achieving faster economic growth. Second, we discuss how economic growth impacts the deficit. We conclude by offering evidence that regulation tends to worsen productivity, especially in product and labor markets, and that regulatory reform that results in productivity-enhancing growth could be a powerful way to improve the dire budget outlook for the United States.