European "Austerity" Is All About Tax Increases--Not Spending Cuts

Lower taxes and less government help the economy.  Higher taxes and more government hurt the economy.  These statements you can take to the bank.

The Economy is Facing some Tough Headwinds  (You think??)

In my blog, Austerity? What Austerity? I note that government (public) expenditures in Europe are mostly going up and, in the few countries where spending is going (slightly) down, it's just a reversal of spending gains in prior years.  Here's the evidence (unfortunately I can't find data for 2011 and 2012):

European Austerity is All About Tax Increases

Most of Europe is in recession.  This shouldn't be a surprise, but don't believe that it's from government austerity!   It's because taxes have been going up and because many peripheral countries are trapped in the euro but need a much lower, devalued currency instead.

Nearly all of the "austerity" in Europe is due to raising of taxes; especially on highest earners and VAT increases.  From Daniel Mitchell at RealClearPolitics:

The PIIGGS imposed no austerity at all on the public sector in the past five years. Government spending on bailouts, subsidies, grants, salaries and entitlements commands a much larger share of these economies than it did just a few years ago.

European austerity has been focused on the private sector — namely, taxpayers with high incomes. That is the second thing the PIIGGS have in common. The highest income tax rate was recently increased in every one of the troubled PIIGGS except Italy (where it was already too high at 43%). The top tax rate was hiked from 40 to 46.5% in Portugal, from 41 to 48% in Ireland, from 40 to 45% in Greece, from 40 to 50% in Great Britain, and from 48 to 52% in Spain.

I’ve already discussed their unfortunate propensity to hike value-added tax rates. Alan explains that they’re doing the same thing for income tax rates. 

In other words, Veronique de Rugy is correct. The “austerity” in Europe generally has been in the form of higher taxes, squeezing the productive sector to prop up the public sector. 

Budget Cutting and Reducing Government Works

History is full of examples where government expenditures were drastically reduced but the private economy boomed:  government spending dropped drastically in the US after World War II and after the Korean war.

So, listening to Democrats and Paul Krugman their biggest cheerleader, austerity is a "dirty word."  He wants even bigger deficits!   Here's some other examples from Daniel Mitchell at RealClearPolitics (with some quotes from Alan Reynolds at RealClearPolitics and IBD)

In Iceland, which did not throw taxpayer money at the banks, government spending was slashed from 57.6% of GDP in 2008 to 46.5% in 2012. The deficit fell from 12.9% of GDP to 3.4%. The economy began to recover in 2011. Iceland’s economic boost from fiscal frugality was neither unorthodox nor unique. After all, the U.S. economy boomed in the late 1990s when federal spending was cut from 22.3% of GDP in 1991 to 18.2% in 2000 [government spending NEVER actually declines but, instead, GDP boomed]. In Canada, total federal and provincial spending was deeply slashed from 53.2% of GDP in 1992 to 39.2% in 2007 with only salubrious effects.

 Compare the tax raisers to tax reducers (from the same article):

It is enlightening to compare the depressing performance of these tax-and-spend countries to the rapidly-expanding BRIC (Brazil, Russia, India and China) and MIST economies (Mexico, Indonesia, South Korea and Turkey). Government spending is frugal in these countries, averaging 32.1% of GDP in the BRICs and 27.4% for the MIST group. Rather than raising top tax rates, all but one of the BRIC and MIST countries slashed their highest individual income tax rates in half; sometimes lower. Brazil cut the top tax rate from 55 to 27.5%. Russia replaced income tax rates up to 60% with a 13% flat tax. India cut the top tax rate to 30% from 60%. Similarly, the top tax rate was cut from 55 to 30% in Mexico, from 50 to 30% in Indonesia, from 89 to 38% in South Korea, and from 75 to 35% in Turkey.

Baltic Countries Had Real Austerity and are Back to Growth

Latvia, Lithuania and Estonia imposed real government spending cuts and are recovering nicely now.  Estonia's president Toomas Hendrik Ilves recently rebuffed Paul Krugman in HuffPost of how horrible government spending cuts are there by saying:

Ilves, a strong austerity advocate, told Bloomberg News in May that the EU should implement austerity in order to boost economic expansion. “You can achieve growth through austerity. Estonia has done that.”

Other quotes from that article say:

Estonia, which in 2011 became the latest country to join the eurozone, has been heralded by some as an austerity success story. That year, it clocked a faster economic growth pace than any other country in the European Union, at 7.6 percent. Estonia is also the only EU member with a budget surplus, and had the lowest public debt in 2011 -- 6 percent of GDP. Fitch affirmed its A+ credit rating last week.