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 back to the level it had been in 2000. The Portuguese population suffered expenditure decline as extreme. From its peak in 2009, inflation-adjusted spending fell almost to the level of seventeen years before. Budget cuts were also violent in Ireland, whose rapid growth of spending up to 2007 came with budget surpluses, not deficits. The expansion of spending hit its peak in 2011 at more than double the 2000 level, then dropped rapidly over the next five years.
The important characteristic of the sharp drops in expenditure in the five EU countries was the conscious goal of achieving a budget in which revenue covered expenditure. By 2018 only the government of Greece had reached that goal. In the process of doing so, the national economy suffered the largest contraction of any in the European Union. In the chapters that follow I devote considerable analysis to that combination – expenditure cuts achieving deficit reduction at the cost of economic contraction.
Figure 0.5 Index of total public expenditure, three austerity-implementing eurozone countries, 2000–2017 (constant prices; year 2000 = 100)
Source: Eurostat.
Austerity Politics and Reality
The austerity-implementing EU governments were repeatedly confronted with the TINA argument by the institutions and governments funding their “bailouts.” Unqualified, definitive judgments such as TINA-justified austerity policy frequently derive from abstract reasoning divorced from the nuances of concrete experience. These definitive policy judgments frequently emerge from carrying an otherwise reasonable hypothesis to its logical extreme.
Mainstream
