The Debt Delusion. John F. Weeks
tax increases come easily to mind. The most obvious would be to work with a cash-flow budget, in which case issuing bonds for recapitalization would not count into expenditure, since the recipient banks must hold them as assets. The more fundamental alternative to austerity budgeting would be to reduce the deficit to GDP ratio through economic expansion – i.e., increase the denominator (GDP) rather than the numerator (the budget deficit). This policy approach features in our subsequent discussion.
A final comment is necessary on the TINA principle as applied to public debt. Bank recapitalization in Spain, a free gift of safe assets to replace recklessly risky lending by private finance, was not without its element of black humor. Spanish private financial institutions used the recapitalization funds to speculate on Spanish government debt, which provoked a “sovereign debt” crisis by driving down bond values and inflating interest rates. To state it simply, the Spanish government saved the banks by giving them public bonds; and, returned to good health, the banks used their idle cash to speculate on the bonds that had saved them from collapse. This scenario justifies a combination of the old clichés “biting the hand that feeds you” and “no good deed goes unpunished.”
This excursion into the unstable quicksand of the TINA principle leads to a working definition of budgetary austerity. As practiced across Europe and in the United States after the global crisis, the essential feature of austerity was to make a balanced budget the first priority for government economic management, even to the point of enshrining it as a legal requirement. By its own design, after the global crisis the Spanish government created an austerity “perfect storm”: an unprecedented recapitalization of banks resulted in unprecedented public deficits and debt under EU accounting rules; passage of a constitutional amendment requiring a balanced budget made the government legally bound to enforce draconian reductions in spending, during which time the banks that started it all enjoyed windfall profits on bond speculation.
Austerity in Practice
We can now identify which governments have implemented austerity, in the specific sense of setting a balanced budget as their priority fiscal goal. Though seeking a balanced budget is the definition of austerity, success in achieving that goal is not a satisfactory indicator of implementing austerity. The gap between spending and revenue can widen or narrow for many reasons having little to do with government policy. To take an example, in a rapidly growing economy, tax income tends to rise faster than public expenditure because higher profits and wages mean households and corporations pay more. That can happen with no change in either public expenditure or tax rates.
Pro-austerity arguments tend to go along with the allegation that people do not want to pay more tax. If a government accepts or actively fosters that belief in tax phobia, austerity budgeting requires reducing expenditure. Figures 0.3 to 0.5 aid in the assessment of which governments did and which did not implement austerity. For those who find such charts tedious or daunting, I provide a full discussion that renders them optional.
When the global crisis began in 2008, the governments of both the United Kingdom and the United States responded with substantial expenditure increases whose purpose was to counteract the forces generating recession. In both countries, political events ended those expansionary budgets. In Britain, the election of May 2010 brought to government a center-right coalition explicitly committed to budget balancing. In the United States, the mid-term election of November 2010 created Republican majorities in both houses of Congress with legislative leaders committed to reducing public borrowing.
Figure 0.3 Index of total public expenditure, United Kingdom and United States, 2000–2017 (constant prices; year 2000 = 100)
Note: In 2017 US federal government public expenditure was 18 percent of GDP; UK central government expenditure was 38 percent of GDP.
Source: US Economic Report of the President 2018; UK Office for National Statistics.
As figure 0.3 shows, in both countries for the first nine years of the new century public expenditure grew continuously. In 2010 austerity policies began, with inflation-adjusted expenditures falling in the United States and leveling off in the United Kingdom. In both cases a rapid reduction in public borrowing was the explicit goal. In the second half of the 2010s the new leadership of the British Labour Party pledged to end austerity budgeting should it come into government.
In the United States in 2017, with the arrival of the presidency of Donald Trump, US budget policy changed. The Trump government showed no tendency to increase social expenditure. However, like the Reagan presidency in the 1980s and George W. Bush’s administration in the 2000s, the Trump administration had no commitment to balancing budgets. To the contrary, it cut tax rates substantially, especially for those at the top of the distribution. As the Republican Party moved further to the right over four decades, it committed to balanced budgets when Democrats held the presidency, but abandoned that commitment when one of its own occupied the White House. Following that rather inconsistent approach to public spending and revenue, the Trump administration ended austerity budgeting in the strict sense of giving priority to “balancing the books.”
Moving across the Atlantic, assessing the practice of austerity in the strict sense of budget balancing is straightforward for the countries of the European Union. In the mid-2010s, EU governments agreed to make balanced budgets – austerity – the central goal of public budgeting policy. The so-called Excessive Deficit Procedure of the Stability and Growth Pact committed all member governments to near-zero borrowing. Some governments, notably Spain’s, enshrined this commitment in their national constitutions.
The four largest continental EU countries all had growing inflation-adjusted public expenditure in the years immediately before the global crisis (figure 0.4). Real expenditure declined dramatically in Spain after the global crisis. The sharp decline shows an unambiguous case of austerity policies. Over the same years expenditures fell in Italy, but considerably less in comparison with Spain. Nonetheless, the decline in expenditure by the Italian government was more than sufficient to qualify as an austerity policy. The implementation of expenditure cuts in both Italy and Spain followed from an explicit goal of eliminating deficits, and in both countries the austerity policy occurred as part of agreement with the European Commission.
Figure 0.4 Index of total public expenditure, four major eurozone countries, 2000–2017 (constant prices; year 2000 = 100)
Source: Eurostat (statistical agency of the European Union).
In contrast, spending in real terms continued to expand in France and Germany after 2008. The explanation of why Italy and Spain implemented explicit deficit reduction policies while France and Germany did not lies in the politics among EU governments more than in the prudence, or lack of it, of the two governments.
Three smaller EU countries, Greece, Ireland and Portugal, implemented austerity programs of severe expenditure reduction. These three countries carry the dubious distinction of achieving fame, indeed infamy, as a result of budget programs imposed by external institutions, with the European Commission and the European Central Bank having the leading roles. In all three cases the imminent threat of collapse of national financial sectors led the governments to accept budget conditions devised by officials in the European Commission. Pressure from other EU governments, with the German government in the lead, left the governments of Greece, Ireland and Portugal with the stark choice of accepting extreme budget cuts or suffering national economic collapse.
The expenditure cuts were indeed severe (figure 0.5). In Greece, public expenditure reached its peak in 2011, 35 percent above that in 2000. Six years later, in 2017, inflation-adjusted expenditure had collapsed almost