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Understanding Austerity


Understanding Austerity

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Sweden has significantly cut government spending without equivalent increases in taxes. Their commitment to reform has paid off in economic growth (chart by Veronique de Rugy, Mercatus Center)

GDP Growth Rates: The Swedish Approach | Mercatus

mercatus.org

What does austerity mean in Europe? Veronique de Rugy's latest chart shows that it doesn't include substantial spending cuts.

This chart shows government spending using Eurostat data that is adjusted for inflation using Eurostat deflators with base year 2009. Data from the Eurostat is used to chart total government expenditures for various Eurozone countries in constant (2009) Euros for the period of 2000 to 2011.

This chart shows government spending using OECD data that is adjusted using the purchasing power parity (PPP) exchange rate. Data from the OECD is used to chart total government expenditures for various Eurozone countries in U.S. dollars for the period of 1995 to 2010.

This chart places Ireland’s spending in comparison with other select EU Zone countries. Data from the European Union’s Eurostat is used to chart total government expenditures in billions of Euro’s for the period 2002 to 2011.

No major spending cuts in Italy, according to Veronique de Rugy.

No austerity in France, according to Veronique de Rugy

Government expenditure has gone up in Spain, according to Veronique de Rugy

Has austerity truly failed in Europe? Veronique de Rugy takes a look at total government spending in key European countries. The trend is clear—spending continues to grow.

"The economic literature is clear. The way to cut debt is by cutting spending. Tax hikes should be kept to a minimum and best accomplished by base broadening rather than by raising marginal rates," says this critique of the "balanced approach" to austerity (as opposed to actual austerity).

Veronique de Rugy explained her position on C-SPAN that most European nations are not engaging in true austerity measures and are instead increasing taxes and revenue without significantly cutting spending. She said their plans are making things worse, and that true budget cuts would help their economies recover. She responded a video clip of a May 23, 2012 Question Time in the British House of Commons, and to telephone calls and electronic communications.

Veronique de Rugy discusses austerity in Europe on CNBC, saying not all austerity is the same and that a better option is austerity with spending cuts accompanied with structural reforms.

The critics of austerity have got it all wrong, says Veronique de Rugy on Reason TV. Many European countries haven't cut spending at all and, among the ones that have, most have made relatively minor trims while also hiking taxes. That's known as "the balanced approach," and it almost never works to reduce debt-to-GDP ratios or get economies moving again.

  • Angela Allyn
    Angela Allyn

    Germany is actually a case study for austerity NOT working. Between WWI & WWII austerity was forced on Germany and the Second World War was the result. After WWII the Marshall Plan was put into place because AUSTERITY DOES NOT WORK. If Germany is the best "proof" that you can come up with after 30 plus years of trying austerity around the globe this is a joke.

This chart uses Eurostat data that is adjusted for inflation using Eurostat deflators with base year 2009 to show government spending in European countries employing "balanced austerity."

This chart shows government spending in European countries supposedly employing austerity measures, using OECD data that is adjusted using the purchasing power parity (PPP) exchange rate.

"Data from the European Union’s Eurostat is used to chart total government expenditures in billions of Euro’s for the period 2002 to 2011."

Following years of large spending increases, Spain, the United Kingdom, France, and Greece—countries widely cited for adopting austerity measures—haven’t significantly reduced spending since 2008. These countries still spend more than pre-recession levels! Whenever cuts took place, they were always overwhelmed by large counterproductive tax increases. This approach to austerity—some spending cuts with large tax increases—is called the “balanced approach."

Veronique de Rugy explains austerity in the UK, drawing on a number of sources, in this National Review Online op/ed. "As you know by now, much of the criticisms about austerity measures implemented in the U.K. make it sound like the country has dramatically cut spending. But the data show that to be far from the truth. Spending in the U.K. is growing at a slower rate than it was scheduled to, but it is growing. Unfortunately, British taxes are also growing."

"Austerity means different things to different people. For some people, austerity means adopting a debt-reduction package made of a mix of spending cuts and tax increases. For others, it means adopting a package made mainly of spending cuts—including reforms of social programs. The lack of a distinction between the two meanings of the word—and hence, the distinction between two different debt-reduction policies—is unfortunate."

Latvia, Lithuania and Estonia provide good examples of successful fiscal adjustments. In the last few years, and contrary to the rest of Europe, the Baltic countries have focused on significantly cutting government spending without equivalent increases in taxes. Between 2008 and 2011, Estonia and Lithuania reduced nominal spending by 5 percent, and Latvia by 11 percent. As a result, the Baltic states have experienced some of the largest economic gains in the world.

Two Kinds of Austerity | Mercatus

mercatus.org

"If the economies of Spain, France, Britain and other European nations are suffering, it's not because of 'savage' spending cuts. It's because small spending cuts are overwhelmed by tax increases."

Evidence suggests that austerity can be successful so long as it isn't modeled after the so-called “balanced approach"—closing budget gaps with higher taxes. In a 2009 paper, Harvard University's Alberto Alesina and Silvia Ardagna found fiscal adjustments consisting of both tax increases and spending cuts generally failed to stabilize the debt and were also more likely to cause economic contractions. Successful austerity packages resulted from making spending cuts without tax increases.

This chart uses GDP growth rate data from the OECD to compare economic growth in Sweden, the U.S., and France from 2006 to 2011. While each recorded negative economic growth after the recession, Sweden not only took the largest hit but also experienced the largest rebound by 11 percent (from –5 percent in 2009 to 6.1 percent in 2010). The difference: France and the U.S. have yet to cut spending, while Sweden has significantly cut government spending without equivalent increases in taxes.

This chart shows the United Kingdom’s government spending from 2000 to 2011 in nominal and real pounds.

These charts show the profiles of European countries’ spending patterns to assess the magnitude of change in real government expenditures between 2002 to 2011.