In all the discussions in Europe about the consequences of so-called
"austerity," the only numbers presented as evidence that austerity
measures have been implemented consist of statistics indicating that
budget deficits have gone down during the past three years.
Indeed, they have. The average level of deficit as a percentage of GDP
in EU countries in 2012 is much lower (4%) than it was at the height of
the crisis in 2009 (6.9%).
For the Keynesian critics of austerity, this explains why most countries
on the continent are still in recession, or close to it, and why
unemployment is reaching record highs. Austerity is killing demand,
killing employment, killing growth. The only way to restart the economy
is to forget about the deficit and the debt and to go ahead with more
There is however a fundamental confusion over the meaning of the word "austerity"
which impedes a better understanding of the situation and precludes a
more relevant debate over the causes of the crisis.
It should be obvious that there is no direct relationship between
reducing the size of the deficit and reducing the size of government. A
budget deficit can be reduced either by cutting spending or by
increasing revenue. It can also be reduced if spending is cut a lot but
taxes are cut only a little. It can be reduced even as spending
increases if revenues increase even faster.
In practice, "austerity" can thus cover all kinds of situations with
differing economic impacts. The term can apply just as well to growth as
to reduction in the size of government.
It seems to be universally taken for granted that austerity measures
have meant drastic spending cuts, coupled with some tax increases, the
net effect being a downsizing of government. But is this really the
Governments keep growing
The latest Eurostat data indicate that there has only been a slight
decrease of 1.7% percentage points in government spending as a
proportion of GDP in the 27-member European Union since 2009. That
proportion is, however, still four percentage points higher in 2012 than
before the crisis started, 49.4% compared to 45.6 % in 2007.
In nominal terms, government spending has never stopped rising in the
Union as a whole since the beginning of the financial crisis, except in
2011 when it remained constant (see Figure). Spending grew by 6.3% in
the last three years, in other words during the period when "austerity"
policies were supposed to have been applied.
Thus, whenever finance ministers announced budget cuts, they were
actually referring not to absolute reductions in total spending but
simply to spending increases that were lower than what was previously
planned or to cuts that were offset by more spending elsewhere.
“Governments in almost all
European Union countries are as large as they were when the
crisis started in 2007 or even larger today. If we define
austerity as the measures taken to reduce budget deficits,
then in that sense austerity is indeed responsible for the
Total general government revenue and expenditure
in billions of
euros ‒ European Union (27 countries)
Source: Eurostat, Government revenue, expenditure and
There are only a handful of countries where nominal expenditures really
fell between 2009 and 2012, including Greece and Portugal. However, both
in nominal terms and in proportion to GDP, the governments of these two
countries spent more in 2012 than in 2007.
With no net decrease in spending, the deficit reductions observed in
most countries must have occurred because tax revenues went up faster
than spending. And that is precisely what the Eurostat data show, with
revenues up 12.9% from 2009 to 2012, double the pace of increase in
Governments have not been borrowing as much-although they still borrow
heavily, and public debt keeps increasing. Instead, they tax their
citizens more to fund their growing expenditures.
Austerity measures never applied
There is thus an inescapable fact that everyone seems to want to ignore:
Governments in almost all European Union countries are as large as they
were when the crisis started in 2007 or even larger today. If we define
austerity as the measures taken to reduce budget deficits, then in that
sense austerity is indeed responsible for the crisis.
If, however, we define it more properly as policies bringing about a
reduction in the size of government, then these policies cannot be held
responsible for the crisis because they were never applied.
Keynesians will, of course, regret that there haven't been even larger
spending increases, greater borrowing and expanded deficits in the past
few years to stimulate the economy.
But, from a free-market perspective, bloated governments and higher
taxes certainly help explain why European economies are still in the
doldrums, several years after the financial crisis.
What Europe needs is smaller governments, not just in terms of public
spending but also as regards deregulation of the job market and other
structural reforms to encourage entrepreneurship, private investment and
job creation. There will be sustained growth in Europe only when
governments, and not citizens or businesses, finally bear the brunt of
From the same author
Phone-y competition in Canada's wireless sector
311 – May 15 2013)
Is More Business Investment Going to Get Us Out of
310 – April 15 2013)
Quinze années de crise, quinze années de progrès
308 – 15 février 2013)
Milton Friedman aurait-il eu les bons réflexes face à
la crise économique?
297 – 15 février 2012)
La balloune Legault se dégonfle
287 – 15 mars 2011)
First written appearance of the
word 'liberty,' circa 2300 B.C.
Le Québécois Libre
Promoting individual liberty, free markets and voluntary
cooperation since 1998.