Cutting welfare spending reduces budget deficits via supply-side incentives

Steps:

• Identify supply-side policies as measures boosting productivity and labor supply, like altering incentives to work.
• Recall budget deficit as government spending exceeding revenue; it shrinks with lower spending or higher revenue.
• Assess each option's fiscal impact: focus on direct effects on spending/revenue while considering supply-side goals.
• Select the policy that cuts spending without raising it, aligning with deficit reduction.

Why B is correct:

• Cutting unemployment benefits directly lowers government spending, reducing the deficit per the basic fiscal balance formula (deficit = spending - revenue).

Why the others are wrong:

• A: Cutting company tax rates reduces immediate revenue, potentially increasing the deficit despite long-term growth incentives.
• C: Raising education spending increases government outlays, widening the deficit even if it enhances future productivity.
• D: Raising tax-free allowances lowers taxable income, decreasing revenue and thus increasing the deficit.

Final answer: B