Sunday, May 12, 2013

12/5/2013: Much austerity? Not really... & not of the kind we needed

A week ago I published a blogpost exploring IMF data on austerity in Europe, based on a sample of 20 EU countries with advanced levels of economic development (excluding Luxembourg). You can read that post here. The broad conclusions of that post were:

  1. There is basically no austerity in Europe, traceable to either changes in deficits, changes in Government spending or changes in debt. If anything, the European fiscal policies can be characterised by a varying degree of fiscal expansionism during the current crisis, relative to the pre-crisis 2003-2007 period.
  2. This, of course, does not account for transfers between one set of expenditures (e.g. public investment reductions) and other lines of spending (e.g. banking sector measures).
  3. The only area of fiscal policy where austerity is evident is on taxation burden side, which rose in the majority of sampled economies.


The numbers got me worried and in this post I am looking solely on deficits side of Government spending. If there is savage austerity in EU27, so savage it is killing European economies, surely it would show up in General Government deficit numbers. As before all data reported is based on averages and comparatives computed by me from IMF's WEO data as reported in April 2013 edition of the database.

Let's take a closer look.


Only 2 countries out of 20 have recorded a reduction in average deficits during the crisis period (2008-2012) compared to the pre-crisis average (2003-2007). These were Germany, where annual average deficits declined by 0.95 percentage points (pretty significant) and Malta, where annual average deficits fell 0.79 percentage points (also pretty sizeable drop).

On average, EU20 sample annual deficits have increased by a massive 3.44 percentage points over the pre-crisis period. In  non-Euro area states, the average increase was 3.16 percentage points. But in 'savagely austerian' Euro area, the increases averaged 3.51 percentage points.

So far, the Euro area analysts' rhetoric opposing austerity has been focused on 2012 as the year of highest - to-date - cuts. Was this so? Not really:


Again, as above, there is scantly any evidence of deficit reductions, and plenty of evidence that deficits are getting worse and worse. Again, the comparative is not to the absurd levels of spending during peak spending years of the crisis, but to pre-crisis averages. After all, stimulus is not measured by an ever-escalating public spending, but by increase in spending during the recession compared to pre-recession.

The same conclusion can be reached if we look at 2007 deficit compared to 2012 deficit.


In other words, folks, Europe has had, so far, only 3 measurable forms of austerity, none comfortable to the arguments we keep hearing from European Left:

  1. Tax increases (remember, we want to soak the rich even more, right?)
  2. Revenue re-allocations to banks measures (remember, no one on Europe's official Left has come out with a proposition that banks should not be bailed out) and to social welfare (clearly, the Left would have liked to spend even more on this)
  3. Germany
Note: we must recognise the simple fact that social welfare spending will rise in a recession for a good reason. The argument here is not that it should not (that's a different matter for different debate), but that when it does increase, the resulting increase is a form of Government consumption stimulus.

So let's make the following argument: Euro area did not experience 'austerity' in any pure form in the reductions in deficits. Instead, it experienced a 'stimulus' that was simply wasted on programmes and policies that had nothing to do with growth stimulus (e.g. banks supports). Here are two charts to illustrate:


What the charts above clearly show is that Euro area can be divided into three types of member states:
  • Type 1: states where cumulated 5 year surpluses over pre-crisis period gave way to cumulated 5 year deficits. These are: Estonia, Finland, Spain and Ireland.
  • Type 2: states where cumulated 5 year deficits over the pre-crisis period were replaced by more benign deficits over the crisis period period. These are Germany and Malta.
  • Type 3: all other euro area states where cumulated 5 year deficits over pre-crisis period were replaced by even deeper cumulated deficits over the 5 years of the crisis.
The only two types of fiscal policy that Euro area is missing in its entirety is the type where pre-crisis deficits gave way to crisis period cumulated surpluses (no state in the sample delivers on this) and the type where pre-crisis surpluses gave way to shallower crisis-period surpluses (only one European state - Sweden - qualifies here).

Oh, and one last bit relating to the chart above: all of the peripheral countries, save Italy, had a massive increase in deficits on cumulated basis during the crisis compared to pre-crisis period. Apparently this is the savage austerity that has been haunting their economies.


Updated:
An interesting issue raised by one of the readers:
And my response:


6 comments:

Ioannis1959 said...

My feeling is that the general austerity vs growth debate is totally misplaced. So far we had austerity for the private sector (firms and individuals) through higher taxes and welfare cuts, whereas the state sectors and supra European institutions keep on enjoying their spending and inefficient management practices, thus crowding out private enterprise. Austerity should simply shift to the public sector parasites, resulting in less state. If anything, the state sector should just focus on providing the protective framework and platform for private sector investment.

Ioannis1959 said...

My feeling is that the general austerity vs growth debate is totally misplaced. So far we had austerity for the private sector (firms and individuals) through higher taxes and welfare cuts, whereas the state sectors and supra European institutions keep on enjoying their spending and inefficient management practices, thus crowding out private enterprise. Austerity should simply shift to the public sector parasites, resulting in less state. If anything, the state sector should just focus on providing the framework and platform for private sector investment.

Michael O'Neill said...

There are some things the private sector does well - cleaning up after its own mess is not one of them. Neither is self-regulation to the required standard - or, in the Banks' case, to ANY standard. Suggesting the government should step back and let them at it is not acceptable.

However I totally agree that the endless government overspend on its own administration has to be stopped and targeted stimulus applied - from the bottom up, because Trickle Down Orthodoxy is a LIE pure and simple.

TrueEconomics said...

Michael, I have no idea what in my post prompted the first half your comment, but I agree with the second bit.

Anonymous said...

Big gap in this analysis: Since tax revenues plummet in a deep recession like the one we just experienced, deficits naturally increase proportionally. So of course deficits increased; only a massive increase in taxation or a massive decrease in government spending would have avoided higher deficits. Even a slight reduction in government spending would still result in larger deficits.

TrueEconomics said...

Big gap in reading skills, I presume. Read the link at the top of the post on what happened with tax revenues.