Nation of Beancounters

Is Britain reeling under austerity?

Posted in Uncategorized by Navin Kumar on January 30, 2012

No, says Scott Sumner, in one of the best blog posts I’ve read recently:

I was curious to see just how tight British fiscal policy actually is, so I checked the “Economic and Financial indicators” section at the back of a recent issue of The Economist. They list indicators for 44 countries, including virtually all of the important economies in the world.  Here are the three biggest budget deficits of 2011:

1.  Egypt  10% of GDP

2.  Greece:  9.5% of GDP

3.  Britain:   8.8% of GDP

Egypt was thrown into turmoil by a revolution in early 2011.  Greece is, well, we all know about Greece.  And then there’s Great Britain, third biggest deficit in the world.

I suppose some Keynesians work backward, if there is a demand problem it must, ipso facto, be due to lack of fiscal stimulus.  If the deficit is third largest in the world, it should have been second largest, or first largest.

A slightly more respectable argument is that the current deficit is slightly smaller than in 2010 (when it was 10.1% of GDP.)  But that shouldn’t cause a recession.  Think about the Keynesian model you studied in school.   If you are three years into a recession, and you slightly reduce the deficit to still astronomical levels, is that supposed to cause another recession?  That’s not the model I studied.  Deficits were supposed to provide a temporary boost to get you out of a recession.  At worst, you’d expect a slowdown in growth.

To get a sense of just how expansionary UK fiscal policy really is, compare it to France (5.8% of GDP), Germany (1.0% of GDP), or Italy (4.0% of GDP).  Lots of people blame ECB policies for the recession, but Britain is not in the eurozone.  Outside the eurozone you have Denmark (3.9% of GDP), Sweden (zero), Switzerland (1% surplus).

I had no idea that The Scandinavian countries had such low deficits. They take public economics seriously.

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