Economic Effects of Fiscal Policy

Increases in federal spending and decreases in taxes can boost overall demand for goods and services. In the short term, that increase in demand encourages businesses to gear up production and hire more workers than they otherwise would. Similarly, cuts in federal spending and increases in taxes can reduce demand, which has the opposite short-term effects.

In the long term, the key determinant of output is the economy’s potential to produce goods and services—which depends on the size and quality of the labor force, on the stock of productive capital, and on the efficiency with which labor and capital are used to produce goods and services. CBO analyzes the economic effects of proposed changes in federal fiscal policies in both the short term and the long term relative to economic projections under current law.

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