Countries historically do not cut their deficits in a slump, instead addressing these problems during a non-recessionary time.
When countries cut in a slump, it often results in lower growth and/or higher debt-to-GDP ratios. In very few circumstances are countries able to successfully cut during a slump, and this happens only when either interest rates and/or the exchange rates fall sharply.
In our analysis, we find that there is no episode in which a country facing the same circumstances as the United States (recent recession, low interest rates, high unemployment) has cut its deficit and succeeded in reducing its debt through growth.
We conclude that there is little evidence provided by A & A that cutting the federal deficit in the short-term, under the conditions the United States currently faces, would improve the country’s prospects. It may even make the United States’ situation far worse.
The Boom Not The Slump: The Right Time For Austerity
by Arjun Jayadev and Mike Konczal
Roosevelt Institute
http://www.rooseveltinstitute.org/sites/all/files/not_the_time_for_austerity.pdf
http://www.rooseveltinstitute.org/policy-and-ideas/big-ideas/boom-not-slump-right-time-austerity