The impacts of the cut in government spending of eighty five billion U.S. dollars have on U.S.
economic activity. However these impacts on economy largely depend on economic multiplier.
According to most estimates economic multipliers of spending are smaller than 1; this means
that, a rise in one dollar on government spending result to less than one dollar increase of gross
domestic product. The spending multiplier is usually less than one due to crowding out effect.
Recourses utilized by the government are obtained from the private sector.
The most recent estimates of spending multipliers were developed by Barro and Redlick.
They focused on variant in defense and non-defense expenditure in the United State on various
time from 1917. Defense spending resulted to greater variation, especially in World War II and
the Korean War. The variation was as a result of war instead of economic perspective. Non-
defense expenditure has a challenge of lack relative of variation as well as the issues of reverse
causality (Bania, Gray and Stone, 2007). As a result, Barro and Redlick claim that defense
expenditure gives the best means to estimate expenditure multipliers. For provisional defense
expenditure, their estimates range from 0.4 to 0.5 for contemporary GDP impacts and 0.6 to 0.7
for GDP impacts in duration of 2 years. The multipliers are higher by 0.1 to 0.2 if the defense
spending is permanent. This implies that extra dollar added to defense expenditure improve
gross domestic product by a smaller amount than a dollar.
According to Alesina and Ardagna, 2010, fiscal incentive centered on tax cuts is more
probable, to enhance growth than those centered on expenditure increases. On the other hand,
fiscal policies centered on expenditure cuts with no tax raise are more probable to do well at
cutting deficits and debt. Moreover, the International Monetary Fund analyzes one hundred and
seventy instances of fiscal policies in 15 developed economies over the 30 years. The finding
was that expenditure cuts are much less negative impact to short term growth than are tax raise