Monday, May 7, 2012

The Austerity Experiment Failed Without Really Starting

Responding to John Cassidy’s the New Yorker, Russ Roberts writes of The austerity experiment:
I’d like some facts. I have seen many articles on austerity. I can’t remember seeing any that suggest that government spending in any European country has actually fallen. Yes, there is talk of spending cuts or cuts in growth rates. But I’d like to see the data that shows the cuts have actually been implemented.
Curious about the actual austerity implemented to date, I ventured over to Eurostat for some fact finding.

Ten days ago I posed the question, What is Austerity? Since that time the number of references to austerity I’ve read that imply different meanings has expanded rapidly. Since this confusion remains, I’ll try to present a couple ways of looking at the data. First, let’s consider budget deficits as a percentage of GDP:
Overall budget deficits for the EU and Euro area have declined since 2009. Portugal, Italy, Ireland, Greece and Spain (the PIIGS) all similarly show declines from 2009 to 2011. Of note, however, is Ireland’s massive budget deficit increase in 2010. On the whole, this metric seems to support the notion of austerity.

Now let’s turn to actual total government expenditures (spending). Here is a graph of overall spending for the EU and Euro area:
In both cases, spending was slowly increasing for the past decade before leveling off in the last year. With this picture in mind, we can now delve deeper into country level expenditure data:
Here are some aspects that jumped out:
  • Germany, France, Netherlands and the UK all spent more in 2011 than in 2009.
  • Portugal and Italy spent an effectively equal amount in 2009 and 2011.
  • Spain and Ireland cut government expenditures but only by a few percent
  • Greece cut spending by over 10%
Of the PIIGS, Greece has clearly cut the most while the other countries have done very little cutting to date, if any. Meanwhile, France and the UK (the focus of Cassidy’s article) are actually among the least austere in Europe having increased government expenditures over the past couple years by several percent.

Rather than austerity stemming from reduced government expenditures, one might argue that the austerity is achieved through increased revenue (taxes). Here is a similar table showing EU revenue data:
As this table shows, government revenues in Spain, Italy and Portugal have increased slightly while remaining flat in Greece and Ireland. The UK and France, however, have witnessed revenue increases of nearly 10 % or more.

Ultimately the debate over whether or not “The austerity experiment” has failed comes down to one’s definition of austerity. Moving beyond this debate requires policy makers and pundits to clarify their intended meaning of austerity before passing judgment on its effects. Hopefully illuminating these inconsistencies will lead to that outcome.

Data Source:

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