Balanced Budget Multiplier

Any increase in government spending has a multiplier effect on GDP. Multipliers are the ripple effects that result from the changes in government spending, taxes and budget.

For example, a reduction in taxes will cause increased consumption and that in turn will result in more output and more earnings and more spending. The pattern is repeated as each person spends more money and earns more. The reduction in taxes thus may have a greater impact in affecting output than the actual amount of the tax reduction. In other words, a reduction of $1 billion in taxes may increase output by $4 billion.

Posted by Boston Institute of Finance