Friday, March 13, 2015

#015: Austerity

If you want examples of countries that have lifted themselves out of an economic crisis through spending and tax cuts, I suggest reading Michael Tanner’s "Austerity Works" article at National Review. For readers with short attention spans, here’s a TL;DR version:

Estonia: Cut public-sector wages by 10 percent. Raised retirement age from 61 to 65. Reduced eligibility for health benefits. Liberalized the country’s labor market. Plans to reduce income tax to 20 percent by 2015.

Currently running budget surplus. National debt is 6 percent of GDP. Economic growth is 7.6 percent (The best in the EU). Unemployment rate is 11.7 percent (down from 19 percent during the worst of the recession). Also, President Toomas Ilves told Krugman to go f*** himself!

Latvia: Made toughest budget cuts in Europe. Half of all government-run agencies eliminated. Public employees reduced by a third. Public-sector wages slashed by 25 percent.

Unemployment declined by 15 percent (down from 19 percent at the height of recession). Real GDP growth reached 3.5 percent. Budget deficit is only 1.2 percent of GDP. National debt is only 37 percent of GDP (and declining). Credit-rating agencies upgraded the country’s credit-worthiness. Was pronounced eligible for EU membership.

Lithuania: Dramatically cut government spending by 30 percent in nominal terms. Public-sector wages reduced by 20 to 30 percent. Pensions cut by 11 percent. Economic growth expected to be 2.2 percent.

Switzerland: Constitution limits the country’s ability both to run debt and increase taxes. Total government spending is only 34 percent of GDP (compared to an average of 52 percent in the EU).
National debt is only 41 percent of GDP. Economic growth has not yet returned to pre-recession levels, but it is better than the growth in other EU countries. Unemployment rate is 3.1 percent (the lowest in Europe).

Canada: Has been reducing spending since the 1990s. Federal spending as a share of GDP fell from 22 percent in 1995 to 15.9 percent. Total government spending declined from 53 percent in the 1990s to 42 percent. Corporate tax rates were slashed from 29 percent in 2000 to 15 percent. Capital-gains taxes were also cut, as were, to a lesser degree, income taxes.

National debt is less than 34 percent of GDP. Its budget deficit is 3.5 percent of GDP (ours is 8.3 percent). Economic growth is at 2.6 percent. Unemployment rate is 7.3 percent.

Other notable examples: Chile, Ireland, New Zealand, Slovakia.

So, yes, if you ignore all of those historical examples, there has never, ever been an economy that has raised itself out of a recession or depression through austerity measures. Nope, not one!

Further References