I think horror works best when its on a small budget, for several reasons. Firstly, big effects are not scary, ideas are. And stripped of budget, you have to use suggestion and ingenuity to create tension, which more often than not works much better than a big, impressive monster or spectre. The best big-budget horror films are The Shining, The Omen, Jaws and The Exorcist and this is, again, because the concepts they are dealing with are inherently creepy. I wouldn't say the Exorcist is necessarily scary, but it is unnerving and among the best put-together horror films made. The Shining excels because Kubrick knows how to throw things off-centre - we're still dealing with a believable situation and characters, but events are out of the ordinary. He slow-builds to perfection in that film.
Someone said that the best horror films make you afraid of something you didn't know you were afraid of and, though it is a PG and a big entertainment, the first half of Jaws is classic horror in this mould. Looking at smaller budget films, stuff like Night Of The Living Dead still has some chilling sequences. The first time you see the zombies outside chowing down on human flesh and bones, it is unnerving. When the woman in the basement is virtually sacrificed, I was silenced the first time I saw it. We had basically been poking fun at the shoddiness of the film and the shambling zombies up to that point. I was amazed at how cold that scene was and as for the ending.... for me that is the reason that film is a classic. Its a real downer and it elevates the film above its field.
What gets me is when someone like Romero, who most modern horror filmmakers owe a debt of gratitude, comes along with a new film, it underperforms worse than absolute shit like The Fog, which no doubt cost 3 or 4 times as much to make. I've yet to see Hostel and word has been mixed, but at least it seems to get with the nasty (that came out wrong) and not pat you on the head before shouting "BOO!" down your ear. Same goes for The Devil's Rejects - i'm looking forward to seeing some serious exploitation 70's style. But the other stuff, with the oh-so-pretty leads and lack of gore or terror just does not interest me.