Saturday, 4 May 2013

What kind of austerity does Europe have?

The Financial Times lexicon defines austerity as "official actions taken by the government, during a period of adverse economic conditions, to reduce its budget deficit using a combination of spending cuts or tax rises". As anyone with access to newspapers, TV or the internet will know, Europe is currently under a regime of austerity. But what kind of austerity? As the FT definition makes clear, austerity comprises either spending cuts, tax increases, or some combination of the two.

In this blog post, Constantin Gurdgiev examines IMF data on 20 European economies in an attempt to answer the question posed above. In particular, he looks at changes in tax revenues, government expenditures and budget deficits between 2003-07 (pre-crisis) and 2012 (post-crisis). He finds that tax revenues as a percentage of GDP have increased in 12 out of 20 nations, and absolute revenues have increased in 19 out of 20 countries. He finds that government expenditures as a percentage of GDP have increased in 17 out of 20 countries, and absolute government expenditures have increased in all countries. Finally, he finds that budget deficits (calculated both ways) have increased in 17 out of 20 countries.

His main conclusion is that austerity in Europe has mainly comprised increases in taxes, rather than reductions in spending. One response to Gurdgiev's descrptive analysis is that government expenditures have been cut relative to projected increases. Another response is that countries' GDPs shrank so much during the crisis years (2007-08) that increases in taxes and expenditures as a percentage of GDP were, in a sense, inevitable.

1 comment:

  1. 'Austerity' is of course a relative term. My understanding is that in the UK at least government spending has actually risen. In any case, even though losing your job/house would of course be pretty unpleasant, it seems to me that any material inconveniences of 'austerity' in European countries would be viewed as mild in the extreme by most of the population of the world!