The Myth Of Failed Austerity

[Chris]

First let me start with the Investopedia Definition of Austerity:

A state of reduced spending and increased frugality in the financial sector. Austerity measures generally refer to the measures taken by governments to reduce expenditures in an attempt to shrink their growing budget deficits.

This pretty much is in line with what all media outlets are using for their reporting. Around the world, media and politicians and Keynesian Economists are claiming that Europe is a perfect example of why Austerity is failing and causing another recession. They claim that European countries have cut their government spending and this is making things worse.

They then hold up the USA with its huge increases in spending and stimulus policies to show how things should be done to improve the economy. While many admit that the US economy is not fully recovered, the claim is that all that is needed is a bigger increase in spending and more stimulus and then everything will be sunshine and lollipops.

Comments like this have been repeated so many times that most people simply believe that Europe has followed a plan of austerity, i.e. actually cut spending, and that this is making things worse. While I agree that many European politicians constantly talk about every effort being made to cut spending, I believe that that is all they have done, i.e. talk about it. Ireland and the UK are constantly held up as examples of how bad austerity is for the economy, but is this really true?

Of course, everyone is entitled to their own opinion, but they are not entitled to their own facts. So let's look at the facts about European government spending and GDP growth.

This first table shows European countries' GDP growth sorted by the 2011 value. What stands out here is that the top three places are made up of the three Baltic States Latvia, Lithuania and Estonia, all with double digit GDP growth in 2011. So what have these countries done to get such a large increase in GDP? Let's take a look at the next table below.

|GEO|2003|2004|2005|2006|2007|2008|2009|2010|2011|
|Latvia|11.70|16.48|21.30|23.62|32.30|9.27|-18.74|-2.19|11.66|
|Lithuania|9.32|10.07|14.93|14.95|19.23|12.79|-17.77|3.58|11.59|
|Estonia|12.12|11.08|15.45|19.76|20.00|1.03|-15.23|4.08|11.37|
|Romania|29.87|25.30|16.81|19.28|20.70|23.72|-2.63|4.27|10.71|
|Norway|3.91|10.09|11.76|11.33|5.76|10.99|-6.94|6.80|8.08|
|Poland|4.28|9.65|6.36|7.80|11.01|8.39|5.41|5.36|7.53|
|Luxembourg|7.67|6.28|10.29|12.04|10.56|-0.33|-3.60|10.77|6.81|
|Bulgaria|7.90|11.20|14.21|13.85|16.22|15.14|-1.40|3.20|6.74|
|Finland|1.31|4.63|3.39|5.30|8.48|3.25|-7.19|3.76|5.91|
|Iceland|3.07|10.53|10.28|13.93|11.97|13.13|1.17|2.60|5.85|
|Austria|2.03|4.32|4.49|5.62|5.79|3.18|-2.33|3.71|5.00|
|Sweden|4.14|4.56|4.07|6.32|6.17|2.50|-3.07|7.46|4.94|
|Slovakia|10.34|11.20|9.20|11.53|11.72|8.78|-6.06|4.90|4.92|
|Hungary|9.46|10.28|6.55|7.52|5.55|6.22|-3.45|3.83|4.81|
|Malta|-0.52|0.27|5.85|5.61|7.64|7.15|-0.03|6.44|4.24|
|Germany|0.72|2.24|1.31|4.02|4.95|1.87|-4.01|5.13|3.86|
|Belgium|2.81|5.48|4.17|5.07|5.33|3.14|-1.62|4.50|3.85|
|United Kingdom|6.36|5.57|5.24|5.58|5.92|2.04|-2.71|4.62|3.58|
|Cyprus|5.17|8.08|7.96|7.89|8.39|7.90|-1.77|3.28|3.29|
|France|2.91|4.26|3.77|4.66|4.93|2.46|-2.45|2.73|3.06|
|European Union (27 countries)|1.70|4.97|4.40|5.68|6.03|0.54|-5.76|4.45|3.03|
|Euro area (17 countries)|2.95|4.15|3.63|5.15|5.43|2.35|-3.46|2.84|2.67|
|Netherlands|2.52|2.99|4.52|5.22|5.84|3.97|-3.57|2.70|2.25|
|Switzerland|0.85|3.28|2.95|6.04|6.45|5.00|-2.37|3.60|2.17|
|Denmark|2.04|4.68|5.39|5.59|3.90|3.41|-5.04|5.79|1.73|
|Italy|3.07|4.16|2.77|3.94|4.10|1.35|-3.52|2.20|1.71|
|Ireland|7.60|6.65|8.55|9.01|6.19|-5.22|-9.84|-2.97|1.60|
|Slovenia|8.63|7.82|5.73|8.09|11.43|7.66|-4.53|0.14|1.59|
|Spain|7.38|7.43|8.08|8.39|6.86|3.29|-3.65|0.08|1.38|
|Czech Republic|4.70|8.97|6.38|7.59|9.25|5.07|-2.32|1.08|1.10|
|Portugal|2.07|4.07|3.32|4.27|5.26|1.57|-2.02|2.47|-1.02|
|Greece|10.10|7.44|4.20|8.07|6.97|4.50|-0.91|-3.86|-6.13|

This next table shows European countries' government spending increases/decreases, sorted by the 2010 data (data for 2011 is not yet available). One thing that immediately stands out is that the three baltic states have all shown a decrease in spending for two years running, 2009 and 2010. This means that they have actually cut their government spending consistently; or put in other words, they have actually introduced measured austerity.

|GEO|2003|2004|2005|2006|2007|2008|2009|2010|
|Greece|9.25|9.32|2.09|9.69|12.32|11.11|5.76|-8.36|
|Estonia|9.14|8.43|14.15|19.77|21.35|17.90|-2.76|-7.17|
|Lithuania|4.47|10.67|14.98|15.73|23.42|21.21|-3.35|-3.35|
|Bulgaria|6.75|9.60|10.37|4.99|34.44|10.92|3.97|-2.82|
|Latvia|8.34|19.81|21.06|32.18|24.01|18.92|-8.13|-2.13|
|Spain|6.01|8.77|6.83|8.14|9.26|9.20|7.50|-1.05|
|Czech Republic|14.80|-5.68|5.71|4.99|6.83|5.35|6.07|-0.86|
|Italy|5.17|2.97|3.61|5.10|2.34|3.42|2.94|-0.73|
|Hungary|5.52|8.94|8.82|11.88|2.54|3.21|0.79|0.48|
|Slovakia|-1.73|4.39|10.09|7.25|4.65|11.02|11.74|1.03|
|Slovenia|8.70|6.63|4.75|6.36|6.09|12.33|5.53|1.98|
|Romania|24.10|25.67|16.95|26.20|29.85|27.12|1.88|1.98|
|Euro area (17 countries)|3.97|2.99|3.39|3.66|3.96|4.87|4.90|2.10|
|Netherlands|4.49|0.79|1.57|6.98|5.21|6.16|7.15|2.31|
|France|3.94|3.99|4.38|3.50|4.20|3.77|3.94|2.34|
|Belgium|5.42|1.98|9.90|-1.95|4.69|6.51|6.09|2.39|
|Sweden|4.28|1.76|3.45|4.07|2.62|3.96|2.63|2.58|
|United Kingdom|8.59|7.62|7.07|6.13|5.16|11.17|4.41|2.68|
|Switzerland|0.00|0.00|0.00|0.42|2.54|4.76|3.66|2.86|
|Cyprus|18.94|2.49|8.81|6.32|6.47|10.48|7.83|3.10|
|Finland|3.99|4.43|3.70|2.89|4.50|7.34|5.71|3.15|
|European Union (27 countries)|2.97|3.97|4.36|4.53|4.54|3.82|2.05|3.47|
|Austria|3.33|9.27|-2.84|3.84|4.62|4.74|4.19|3.62|
|Iceland|6.22|6.62|5.90|12.29|13.66|54.35|-10.59|3.74|
|Germany|1.80|-0.68|0.95|0.56|0.71|3.11|4.82|3.82|
|Norway|6.34|3.16|3.52|6.64|6.55|9.43|8.15|4.28|
|Malta|13.78|-2.55|5.02|4.45|3.68|10.25|-1.60|4.64|
|Denmark|2.97|3.70|1.99|3.18|2.33|4.87|7.07|5.00|
|Portugal|5.61|6.18|5.84|1.42|5.26|2.61|9.12|5.49|
|Luxembourg|8.33|8.24|7.61|4.07|3.91|7.61|10.00|6.29|
|Poland|5.26|4.61|8.39|8.86|6.76|10.97|8.54|7.38|
|Ireland|6.60|8.05|9.53|10.77|13.84|10.78|1.66|33.07|

Romania is another country in the top 5 for GDP growth, and while they have not actually cut spending they have increased spending by less than 2% in each of the years 2009 and 2010. This is very significant considering that Romania was increasing spending by almost 30% in each of the years 2006, 2007, 2008.

Some people might pick up on Norway and that it is ranking high in GDP growth while still consistently increasing spending by 6-8%. What has to be pointed out here though is that for the 4 years from 2005 to 2008, Norway was running a budget surplus of between 3.5% and 8.7%. Over the past 6 years, they have been living well within their means.

How do things look for Ireland? Well, on the spending side there has been absolutely no decrease, only massive increases except for 2009. Thus, it is no surprise that ireland is 6th last on this list for GDP growth in 2011.

To claim that austerity is failing here or throughout Europe is simply a myth and a lie, as the above figures show. If anything, this proves that actual austerity works if actually done and not just talked about.

Data Source: Eurostat

 

[Brendan Burgess]

Certainly austerity in Ireland is a myth. There is no austerity in Ireland. to pay for the very high social spending and high salaries. Our Social Protection spending is 125% of the EU average.

Does cutting public expenditure dampen down growth by much in an export-oriented economy like Ireland? I presume it does to some extent, but not to the extent that it would do in America.

I would have thought that if we lived within our means and were not constantly facing the threat of economic bankruptcy, the boost in confidence to investors and consumers would probably counteract any dampening down by cutting public spending.

Economists all take different views on the issue. It seems to me that the Fiscal Advisory Council is probably the one to pay most attention to.

Assessment of the Fiscal Stance
As in earlier reports, the appropriateness of the fiscal stance is analysed in terms of a trade-off between supporting domestic demand and ensuring debt sustainability.

The Council assesses the Government’s fiscal stance, as set out in SPU 2012, to be – in the language of the FRB – “conducive to prudent economic and budgetary management”. However, debt sustainability and creditworthiness remain fragile. Weighing the risks to debt sustainability and ongoing weakness in the real economy, the Council supports an alternative fiscal stance involving a total of €1.9 billion of additional adjustments in the period to 2015 compared to the Government’s baseline

 

[shigllgetcha]

Would the three countries listed with increasing GDP be examples of countries starting with a weaker economy, like us in the 90's and to some extent 00's and this might have more to do with their growth? low labour costs maybe being a big positive and all that goes with being a cheaper economy in the eu. Which is a postion we and most of europe arent in

Im a public servant myself and I think any reduction in salaries wouldnt have such a terrible effect on the economy as long as compulsory redundancies were avoided and assurances were given to the same, this would keep public servants spending relatively level as they wouldnt have to worry about being jobless. There would be somepeople that would be left in a very bad position by a pay cut im sure though im just talking in general terms

The main problem with pay cuts in the PS is that to most people (over c.40k per annum) a 10% gross cut is only around 3% net and its net that the exchequer would save. (41% tax, 6.5% pension, 7% USC, 4% PRSI, 10% PRD not being liable on the cut amount). Saying there will be a 10%

To me having a job in 12months is more important that a pay cut. Im sure people with more commitments than me would feel differently and I probably would too in the future but at the moment thats my view. Im not as highly paid as that example though so my net would be alot closer to my gross. 10% to me is around 7-8% net

 

[Chris]

Does cutting public expenditure dampen down growth by much in an export-oriented economy like Ireland? I presume it does to some extent, but not to the extent that it would do in America.

Cutting spending only has a very short term effect on GDP. The money that is not spent by government is money that is then available as capital for the private economy. Just because government doesn't spend money doesn't mean that the money doesn't get put to good use. I think this is something that very often overlooked; people only see the immediate visible effect, but not the unseen effect.
This is of course even worse when the money that is being spent is borrowed, as it then has to be taken out of the economy in the future, with interest, to pay the debt off.

Would the three countries listed with increasing GDP be examples of countries starting with a weaker economy, like us in the 90's and to some extent 00's and this might have more to do with their growth? low labour costs maybe being a big positive and all that goes with being a cheaper economy in the eu. Which is a postion we and most of europe arent in

These economies have been very cheap and attractive for a very long time. They didn't suddenly come on the radar for foreign investment in the last 2 years. The reason why the baltic states are doing well is directly linked to the reduction in government spending. When government spends less it means that it places less of a burden on the private economy which allows that part to expand and invest more freely and easily.

 

[extopia]

Do these government spending figures include amounts spent on bank bailouts, debt repayments, etc. etc. or are they amounts going into the actual economy?

 

[Sunny]

These economies have been very cheap and attractive for a very long time. They didn't suddenly come on the radar for foreign investment in the last 2 years. The reason why the baltic states are doing well is directly linked to the reduction in government spending. When government spends less it means that it places less of a burden on the private economy which allows that part to expand and invest more freely and easily.

Not exactly true. How much of these countries GDP comes from European transfers? They can afford to cut spending because they are getting huge stimulus packages from European funds in areas like infrastructure which help mitigate spending cuts.

A quick search for example suggests that 20% of Estonias 2012 budget is made up of European transfers. Lets see how the economy looks in a couple of years when these transfers end. Then they will have to deal with real austerity to balance their budget.

 

[Chris]

Not exactly true. How much of these countries GDP comes from European transfers? They can afford to cut spending because they are getting huge stimulus packages from European funds in areas like infrastructure which help mitigate spending cuts.

A quick search for example suggests that 20% of Estonias 2012 budget is made up of European transfers. Lets see how the economy looks in a couple of years when these transfers end. Then they will have to deal with real austerity to balance their budget.

But that is beside the point Sunny. Yes, it is easier to change spending habits when your income is subsidised, but that is not the argument. The popular argument is that austerity (a reduction in spending) is failing in countries like Ireland. But fact is that Ireland had not cut one cent in spending while those countries that did cut spending are seeing significant increases in economic activity.

 

[Chris]

Do these government spending figures include amounts spent on bank bailouts, debt repayments, etc. etc. or are they amounts going into the actual economy?

These figures are total government spending. Austerity means a reduction in spending not a reduction in some spending while increasing other spending. But even if you take the governments own figures from the department if finance which show spending excluding the recapitalization then spending has not decreased especially not when adjusting for inflation.