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Admitting that austerity has failed

Written By: - Date published: 8:10 am, June 16th, 2012 - 56 comments
Categories: economy, john key, national, uk politics - Tags: , ,

We’ve written before about how misguided a program of economic austerity is, and in particular how the fantasy of expansionary austerity doesn’t work in the real world. In both the UK and NZ recently elected tory governments have doomed their countries to years of austerity and cuts, and in both cases the results have been dismal. Now it looks like the Cameron’s government has woken up:

£140bn kiss of life for Britain

Chancellor and Bank of England in ‘panic’ bid to hand small firms and house-buyers cheap loans – but will this gamble kick-start the economy?

  • Banks will be loaned money on condition they pass it on in the form of cheaper loans and mortgages
  • Huge sum represents 1/5 of all Government spending
  • Scheme aimed at limiting impact of ‘Eurozone debt storm’ which is blamed for raising the cost of lending
  • Government will soon announce another initiative to underwrite tens of billions of pounds on spending on housing and infrastructure

So much for austerity. I’m no economist, but the package looks panicky and poorly designed to me.  Housing and infrastructure is good – where is the education (reverse the cuts!), where is the research and development? Where is the green, sustainable investment?  The main moves seem destined to just feed another housing bubble, surely we know by now where that ends.  The UK Labour Party weighs in:

Throwing money at banks won’t solve economic crisis, Ed Balls says

Shadow chancellor says banking stimulus package announced by Osborne and King fails to address lack of confidence

Ed Balls has warned that an emergency multibillion-pound package to inject lending into the British economy still fails to address the lack of economic confidence and demand. … He said the measures announced on Thursday night at the Mansion House in London by the chancellor, George Osborne, and the bank’s governor, Mervyn King, should have been implemented two years ago and would not work if businesses were not investing.

So is it too little too late? Probably. But credit to Cameron’s government, they recognised (eventually) that austerity wasn’t working, they’ve ditched it, and they haven’t dithered with half measures. The impact of this package will be watched by the world.

Compare and contrast with our local Nats. They’ve given up on their economic programme too. You can see it in Bill English’s admission that (summarised) “The desired rebalancing of New Zealand’s economy has not been as sufficient as the government would like” and “the government expected its 2010 tax switch to be beneficial following a 5-7 year period” (yeah right). You can see it in John Key’s reaction to the Reserve Bank’s assessment, based on better data, that the economy will not grow as predicted in the budget, and we won’t achieve surplus by 2014/15. Key said “There is nothing different we would want to do at this time”. A total failure of leadership.

Austerity has failed in both the UK and NZ. But at least Cameron’s Conservatives have the wit to realise it, and the courage to act. Key and the Nats are capable of nothing but looking on as the economy spirals slowly down the gurgler…

56 comments on “Admitting that austerity has failed ”

  1. ghostwhowalksnz 1

    The clever Conservatives at least dont have to put the extra borrowing ‘on the books’ as its not borrowing in the usual sense, they are merely printing the money.

  2. tsmithfield 2

    Irresponsible spending eventually leads to austerity because people will stop lending the money to fund the irresponsible spending. In Europe it is not so much that austerity has failed, but rather that people aren’t lending the money to fund it. Look at the trends in yields on sovereign debt in many of those countries and you will see what I mean.

    • RedLogix 2.1

      Irresponsible spending eventually leads to austerity because people will stop lending the money to fund the irresponsible spending.

      Absolute arse about face. The goods and services people purchased with that money were all produced. The materials, the machinery, the labour and organisation that produced all these goods and services existed. The houses, the cars, the household goods and so on were all produced with means that existed.. That’s a really important point.

      The idea that as an economy we were ‘living beyond our means’ is an utter nonsense. Because demonstrably the means were all there. There were two main drivers for why people tended to borrow money.

      1. Workers pay as a portion of GDP is too low. In a stable economy it should be close to 70%, but in many Western countries it has fallen below that… in this country to a miserable 45%. This prompts a rise in household credit to buy the goods and services that the economy is producing.

      2. The bankers and financiers make money by lending money. By deregulation they succeeded in expanding their fraction of GDP activity from under 5% to much higher levels. At one point some 50% of the entire GDP of the UK was in the City of London. This parasitic function squeezes out legitimate productive activity; everyone starts speculating on the rising price of second-hand goods and assets like houses and land… with money that the bankers are lending them.

      There is no need for an economy to ‘borrow money’. Like most right-wingers you keep making the mistake of confusing a household with an economy. While households may have short-term needs to save and borrow… an economy does not.

      If you doubt this proposition consider this. For all practical purposes the whole world is one single economy. From whom do you think the planetary economy needs to ‘borrow money’ to fund itself? Martians?

    • Olwyn 2.2

      Money is not sacred; in the history of the world whole currencies have been dropped and debts cancelled. Apart from rapidly dwindling fossil fuels, (which certainly makes a difference to modern ways of getting out of economic holes), the same land, people and things are there, whatever else money is doing. Bankers can be brought to heel, debts cancelled, and new ways of going about things considered. Rome had to cancel debt at one stage, following on a revolt. According to Simone Weil, “…even if there had been no revolt, a partial cancellation of debt had become imperative, because with every plebian reduced to a slave, Rome lost a soldier.” In modern terms, for every person that falls into the recently minted “underclass” society loses a contributor.

      • Foreign Waka 2.2.1

        You have to ask the question whether the upper class really cares. Look at India or China where you have a vast amount of very poor people and life is cheap. Literally, in the mind of the named societies dead is not such a big affair. Neither is life.
        It seems to me that the push is to create a lot of fear and with that the willingness to accept anything that looks better than the painted picture. Only very few overcome this fear as we see on TV i.e. the man that stood in front of the panzer.
        Many things that are being presented are done via the media which heeds to its master, the one who pays the bills (who might that be?) I personally don’t belief that all this is about money as money is just a means to get what a small group want: power. Power over land, commodities, and people.

        • RedLogix

          Literally, in the mind of the named societies dead is not such a big affair. Neither is life.

          Exactly. Which is why politics is essentially a morality business. What we believe in is really, really important.

          • Olwyn

            Foreign Waka: It is true that I may have been a bit over-optimistic in assuming that people may care whether other people are members of an underclass or social contributors. However, on purely instrumental grounds, the well being of those who have it relies upon a modicum of order. The more abandoned people within its ranks, the more that order is liable to break down. And taking on board what RedLogix says, which I think is true, where morality is overridden, it has a habit of biting people later. Zygmunt Bauman has said, of those who later felt ashamed of not helping others during the terrible events of World War II, “I am sure…that had I refused shelter, I would be fully able to justify to others and to myself that…turning the stranger away was an entirely rational decision. And yet I am sure as well, that were it not for this feeling of shame, my decision to turn away the stranger would go on corrupting me for the rest of my days.” Instrumental rationality has its limits, and they are in many cases moral limits.

          • ianmac

            Redlogix: I read of life and death in the slums of India. A community was close knit, cooperative and sympathetic but with nothing except a few fancy clothes for special occasions. When one died there was grief and sadness, but such was the pressure to survive that the day after the funeral life carried on. It seems that the effect of death in a Western society lingers on and on on and on. Do some here indulge in grief as a badge and because in an affluent society you can afford the “luxury”?

        • fatty

          “Look at India or China where you have a vast amount of very poor people and life is cheap. Literally, in the mind of the named societies dead is not such a big affair. Neither is life.”

          they do have about 40% of the world’s population and India has religious influences their perspective on life/death…its wrong to say ‘life is cheap’ in those countries

          • Olwyn

            I agree Fatty. I think it is easy to mistakenly conclude that the acceptance of death in poor, crowded places shows that life there is cheap. Affluent Western countries have more defences against death, so it comes as more of a shock to the people who live in them. But this does not mean that life is less valued in the former and more valued in the latter.

            • Foreign Waka

              fatty and Olwyn – Did I say that I find it acceptable that in poor countries life is cheap (?????).
              It is great that you try to take the high moral ground – good on you – because I hope you can hold it when poverty surround you and all the fine qualities go out the window. As they do in any society I may add. It is human nature to protect one self and kin before the country or god forbid its ruler.
              As for my comment, it is in India the belief that a person is on a life/death journey but also the atheistic aproach in China that leads to the notion that life is either a/ a repeat experience or b/ replaceable by the next person. And by the way, both of these answers did come from individuals of these cultures. Just saying……

              • Olwyn

                Sorry Foreign Waka, my answer was to Fatty & ianmac, not you in that instance. I accepted your point that the upper class might not care if other people are deprived, and your use of those countries as examples. And I took ianmac’s point about life and death in India & Fatty’s response as a sub-topic, rather than a denial of what you were saying. I agree that life can seem cheap to the upper classes looking on, but not necessarily to the people who are living it.

              • fatty

                “Did I say that I find it acceptable that in poor countries life is cheap (?????).”

                No you didn’t, and neither did I.
                I am saying that assuming ‘life is cheap’ in China and India is wrong.
                They value life no more or less than Kiwi’s do, I don’t know where you get that idea from?
                …in fact I would argue that that global North cheapens the lives of those in the global South.
                We buy the i-phones – Chinese workers kill themselves…they lose their quality of life to pay for our greed.
                If their lives are ‘cheapened’…it is us that is driving the price down. We make sure their life is cheap.

    • mike e 2.3

      THe Stupid Monetarist irresponsible lending by big banks with Goldman Sachs corrupting practises .
      Loan sharks knowing full and well those countries and their banks weren’t able to pay them back.
      Now Goldman Sachs has ex Conmen[Goldman Sachs employees] in every major country as their finance ministers the gouging of Europe continues..
      Austerity for the peasants
      Massive bonuses for the robber barons.
      Lets hope Hollande has some balls to do the same to the bankers as they’ve done to overpaid public servants.

      • Colonial Viper 2.3.1

        THe Stupid Monetarist irresponsible lending by big banks with Goldman Sachs corrupting practises .

        Worthwhile remembering that this has all been empowered by the Federal Reserve printing money at massive quantities, and then lending it out to major institutions like Goldman Sachs at record low (essentially zero i.e. ZIRP) interest rates.

        Oh yah, the Federal Reserve is staffed from top to bottom with alumni from Goldman Sachs and JP Morgan. As is the White House economic council. What a co-incidence.

        NZ does almost as well with an alumni of Merill Lynch as PM.

  3. ianmac 3

    “In modern terms, for every person that falls into the recently minted “underclass” society loses a contributor.”
    In a nutshell. Yes Olwyn. This Government seems to pride itself on creating more “underclass.”

  4. DS 4

    This isn’t an end to austerity in the UK: Cameron and Osborne (and Clegg) are wedded to the idea that slashing government spending in a depressed economy somehow stimulates growth. This is just a significant easing of monetary policy to prevent a credit crunch is (or when) Greece (or Spain) leaves the Euro. Mervyn King and the Bank of England have been the only thing preventing Britain from economic catastrophe since the austerity madness started.

    • RedLogix 4.1

      This is just a significant easing of monetary policy to prevent a credit crunch

      Which will of course not work. Giving banks the credit to create more lending cannot achieve anything when everyone is debt saturated. The are literally injecting the money to exactly the wrong point in the economy.

      Everyone makes the valid point that the solution to too much debt is not more debt. We get that. The only valid answer is to get rid of the debt… especially debt that was created dishonourably in the first place.

      There are only two ways to get rid of it. One is to spend the next few decades in austerity mode painfully paying it all back. Many nations have Debt to GDP ratios over 200%; if we divert say 5% of GDP ( a huge de-leveraging hit) to paying this down to a more sustainable 30% then logically it could take something in the order of 30-40 years to unwind. That is an insanely unstable and risky proposition… societies everywhere, especially in the face of peaking resources, will simply collapse.

      Alternately you could just treat this dishonourable debt with the contempt it deserves. Cancel it and get on with life.

      • Colonial Viper 4.1.1

        Alternately you could just treat this dishonourable debt with the contempt it deserves. Cancel it and get on with life.

        While placing future lending under very strict central controls.

      • Draco T Bastard 4.1.2

        Doesn’t even matter if it was “dishonourable debt” or not either – just cancel it and, as CV points out, put in place some very strict lending rules.

  5. Foreign Waka 5

    The problem is a created one. Once the gold value was disestablished as a benchmark, money became a commodity in itself. Look at all the currency traders and the hedging of money value as well. When they loose, every one of us does too, with a stroke of a pen. When they win, dividends galore. In that way money is being sucked out of any economy with the more unstable ones suffering most. Inflation rides up no matter what and there are only one group of winners, and they are the same all the time.
    Instinctively people realise that savings can be lost in that way but housing and land, once paid off, is logistically and politically a heck of a lot more difficult to grab.
    No matter how much the tell us to invest and save I am suspicious that we are being told to prop up the very ones that devalue our lives. How many times have the oldies paid the price for the politicians short sightedness and the banks greed by saving for old age. In my lifetime I heard stories of already 2 generations experiencing the same debacle.

    • Draco T Bastard 5.1

      Once the gold value was disestablished as a benchmark, money became a commodity in itself.

      This is what happened but you’re looking at the wrong cause. In fact, I think you’ll find that money was a commodity before and partially led to the dropping of the Gold Standard. What makes money a commodity rather than the tool that it should be is interest. Get rid of that and money will no longer be a commodity.

      • Foreign Waka 5.1.1

        just some history of money:
        Many cultures around the world eventually developed the use of commodity money. The shekel was originally a unit of weight, and referred to a specific weight of barley, which was used as currency. The first usage of the term came from Mesopotamia circa 3000 BC. Societies in the Americas, Asia, Africa and Australia used shell money – often, the shells of the money cowry (Cypraea moneta L. or C. annulus L.). According to Herodotus, the Lydians were the first people to introduce the use of gold and silver coins.[14] It is thought by modern scholars that these first stamped coins were minted around 650–600 BC.[15]
        Song Dynasty Jiaozi, the world’s earliest paper money
        The system of commodity money eventually evolved into a system of representative money.This occurred because gold and silver merchants or banks would issue receipts to their depositors – redeemable for the commodity money deposited. Eventually, these receipts became generally accepted as a means of payment and were used as money. Paper money or banknotes were first used in China during the Song Dynasty. These banknotes, known as “jiaozi”, evolved from promissory notes that had been used since the 7th century. However, they did not displace commodity money, and were used alongside coins. Banknotes were first issued in Europe by Stockholms Banco in 1661, and were again also used alongside coins. The gold standard, a monetary system where the medium of exchange are paper notes that are convertible into pre-set, fixed quantities of gold, replaced the use of gold coins as currency in the 17th-19th centuries in Europe. These gold standard notes were made legal tender, and redemption into gold coins was discouraged. By the beginning of the 20th century almost all countries had adopted the gold standard, backing their legal tender notes with fixed amounts of gold.
        After World War II, at the Bretton Woods Conference, most countries adopted fiat currencies that were fixed to the US dollar. The US dollar was in turn fixed to gold. In 1971 the US government suspended the convertibility of the US dollar to gold. After this many countries de-pegged their currencies from the US dollar, and most of the world’s currencies became unbacked by anything except the governments’ fiat of legal tender and the ability to convert the money into goods via payment.

        • Draco T Bastard

          Yes, I’m quite aware of the history. Now what was your point in quoting it? What, specifically, were you addressing in my comment?

          The first usage of the term came from Mesopotamia circa 3000 BC.

          And that’s about the first record of debt, interest and financial collapse due to over accumulation by a few as well and probably the main reason why nearly every religion (including Christianity) bans interest as it always results in that over accumulation.

          The gold standard, a monetary system where the medium of exchange are paper notes that are convertible into pre-set, fixed quantities of gold, replaced the use of gold coins as currency in the 17th-19th centuries in Europe.

          Yeah, it took 2 centuries to implement because it kept failing. In fact, after full implementation in ~1891 it was then dropped, again, ~1911 so that the build up for WW1 could be paid for.

          After World War II, at the Bretton Woods Conference, most countries adopted fiat currencies that were fixed to the US dollar. The US dollar was in turn fixed to gold.

          Which was why the US$ became the reserve currency and why it should no longer be considered that. The reasons why it still is seems to be a) habit and b) the US managed to persuade OPEC (Specifically, Saudi Arabia) to price oil in US$.

  6. captain hook 6

    gosh they will all be able to buy hardly davisons and leaf blowers and chainsaws now.

  7. NattyM 7

    I’d really appreciate it if someone could explain if there is any benefit to countries or their ordinary people in currency trading or is it just another way of greedy people and greedy companies making money out of actually producing nothing of any tangible worth or benefit?

    • RedLogix 7.1

      It is vital to understand that virtually all money is nothing more than ‘credit’. Credit is simply a ‘promise to pay’.

      Let’s put it this way. You go to Mitre 10 and grab a leaf-blower off the shelf, stroll up to the check-out and whip out your EFTPOS card. No actual money changes hands. What happens is a bit of double entry bookkeeping. Credit is swapped from your bank account to Mitre 10’s. An equal and opposite debt travels back the other way. Essentially the bank has acted as a trusted bookkeeper tracking a credit transaction. That is their legitimate role and they are entitled to charge a modest fee for doing so.

      We stopped using gold or silver coins ages ago. Even paper notes are clumsy compared to this remarkably elegant system of pure credit transactions.

      At the same time however it places the bankers in a position of privilege, or Seigniorage as the technical term goes. The core problem is that when bankers are allowed to exploit seigniorage and make too much money as a result. They use that wealth and power to capture the political system in order to give themselves more privilege, and thus more wealth. And as the above article states, one of the most lucrative forms of illegitimate seigniorage is the trading in currencies. Money changing is one of the oldest evils.

      In a just economy people are paid enough to buy the goods and services they produce. If you cannot do this then by definition you are a slave. Being forced to borrow money in order to buy goods and services is simply a form of debt-servitude. In effect we have not really moved all that far from the Company Town model.

      This again is an ancient evil but rife in the modern world.

      Money is a necessary tool. But like all tools it must be used with discipline and restraint.

      • Olwyn 7.1.1

        Beautifully said, RedLogix!

      • Colonial Viper 7.1.2

        The nature and role of money (Steve Keen)


        Thus, suppose Tom would like a pig from Jane but Tom’s wheat crop is not yet ready to harvest. If Jane trusts Tom she might be willing to give him the pig now and have Tom give her the wheat when it’s ready. But suppose Tom is a stickler, and he writes a formal little note that says “Tom owes Jane one pig’s worth of wheat” and gives it to Jane in exchange for the pig. Later, at harvest time, Tom delivers the wheat to Jane and she gives him the note in exchange, since she doesn’t want to claim any more wheat from Tom. Tom can throw the note in the fire, because he has fulfilled his promise and the note has no more purpose. Figure 10.1 is a little diagram of the two-part exchange. Tom’s note is depicted as IOU (I owe you: Tom’s promise to Jane).

      • True Freedom is Self-Governance 7.1.3

        “In a just economy people are paid enough to buy the goods and services they produce. If you cannot do this then by definition you are a slave. Being forced to borrow money in order to buy goods and services is simply a form of debt-servitude.”

        Nicely put, now if only more people would accept that people in debt aren’t neccessarily blowing it all on excessive luxury items, that many of them simply had no choice but to borrow to live.

      • ianmac 7.1.4


    • Foreign Waka 7.2


      Essentially traders take advantage of fluctuations in the value of currencies. The better the prediction (political and economical) the more money one makes from – money. So in that sense Money is a commodity.

  8. Colonial Viper 8

    OMG what a screw up.

    Loading households down with more debt is absolutely the wrong way to go. Trying to get “growth” with debt. It’s just more of the same: pretend and extend.

    Steve Keen has the right idea. Issue every household with a $10,000 credit. If the household has debt, that credit must be used first and foremost to pay that debt down. If that household does not have debt, it can use that bonus as a cash injection.

    And make it much harder for ponzi loans to be made ever again.

  9. DH 9

    The pommy initiative does sound pretty stupid and ill-advised. Banks have caused the economic problems, you don’t give them more money to make things even worse. The Govt will carry the cost of the low interest and the banks will still whack on their usual high margins & lend into the property market.

    The problem is fairly straightforward IMO. NZ banks don’t do venture capital, they haven’t since they were privatised. They only lend against secured assets which with a business is usually shareholder capital or the private assets of the owner(s). When you get a recession the asset base of a business tends to shrink and banks won’t lend against depreciating assets so businesses get hit with a shortage of capital and higher interest rates. At a time when businesses need to cut costs they’re instead faced with higher interest rates on borrowing or no access to funding at all.

    IMO the best way to kickstart the economy is to bypass the private banks and start lending more to small & medium business direct at low interest rates. Go back to the old ways when banks lent on the back of a good business plan and responsible risk evaluation. Forget the tax breaks, Govt subsidies & handouts, make businesses earn their keep just give them access to reasonably priced capital and the good ones will start thriving.

    It would be costly to do that, we don’t have the BNZ infrastructure any more, to begin with the Govt would end up writing off a good percentage of the lending due to incompetence but it would still more than pay for itself IMO.

  10. Money lend to banks under the condition they would lend it to main street and you believe that?
    Here is what Mervyn King said about the banks unwillingness to loan money to small businesses in February of this year. The unregulated wilderness that is the UK banking system is collapsing under a ridiculous mountain of debt created with the Derivative scams and this is just a banking bailout UK style. 
    Austerity is fine for the plebs in the street just so long as it isn’t for the perpetrators of the banking Short Change con artists!

    • joe90 10.1

      In this interview Paul Buchanan notes how the lenders refuse to take a haircut by conveniently ignoring the inherent risks of capitalism.


    • DH 10.2

      Yeah King has it right and it’s even worse in NZ. NZ banks are risk averse, I can’t even get a simple business overdraft without putting up 150% security to cover it. And if I did get an overdraft the interest rates are usurious. The banks have strangled our economy with their refusal to take any risks with business lending.

    • Johnm 10.3


      You’re 100% right! This is Bankster Insurance as the Euro zone heads deeper and deeper into crisis. Pete Pom won’t see a bean of it!

      Want to get the economy moving? Then start transferring the 1%’s illgotten gains down to the ordinary people reduce inequality big time. Getting the rich to part with their huge surplus wealth to help Pete Pom would cause the most almighty howling uproar! But it’s the way to go.

  11. Draco T Bastard 11

    We’ve written before about how misguided a program of economic austerity is,

    Get it right, it’s not economic austerity but financial austerity and the poor are having it imposed upon them by the rich.

    Key and the Nats are capable of nothing but looking on as the economy spirals slowly down the gurgler…

    Which is, apparently, what they want as it would allow them to sell even more of NZ off in a firesale to their rich mates.

  12. captain hook 12

    money is quite simply a lien on future production but unfortunately is absolutely vital to the maintenance of life in industrial countries.
    It also keeps the score for psychopaths who use it to keep the populace cowed, obedient and in awe of expensive gew gaws that they will never be able to afford.
    we right up the old wittgensteinian ladder now kiddies.

  13. OneTrack 13

    Just keep borrowing and spending. What could go wrong?

    • RedLogix 13.1

      Not read the thread much?

      I’ll give you a clue. I agree that the answer to too much debt is not more debt.

      So what are our choices do you imagine?

      • OneTrack 13.1.1

        Cut wasteful government spending ( useless quangos such as the Race Relations Conciliator), enable more revenue generation (hydrocarbon exploration, coal and other mining), reduce government barriers to development (excessive RMA restrictions, etc).

        How about them for starters?

        • BernyD

          We’d be better declaring ourselves part of Australia go over there if you want to work in a mine.
          It’d be a hard sell , but if we tell them our government is crap they might take pitty on us.

        • RedLogix

          A government exists to serve all the people, not just you. Everyone has particular interests and needs, so what is useless to you is certain to be vital to someone else. The National party made great noise about ‘cutting wasteful’ spending before it came to power, but despite every opportunity and motivation to do so in the last four years it has found relatively few genuinely ‘wasteful’ areas to cut.

          You’re welcome to the warm fuzzies you get from ranting about it… but in reality the big four government expenditures are super, education, welfare and health which alone account for around 80% of all expenditure. Fritzing about with tiny quangos on the margins is pointless and insignificant.

          New Zealand is one of the easiest places in the developed world to do business; if you can’t do business here you shouldn’t be in the game.

        • Draco T Bastard

          Ah, typical RWNJ answer – it’s all the guvumints fault, WAAAAAH.

          Hey, did you know that private surplus more or less equals the government deficit? See, contrary to the neo-liberal BS that you’ve swallowed the government is actually the source of wealth and not the rich or private enterprise.

          • RedLogix

            That is one hell of an interesting link DtB. Keith Rankin was my first economic lodestar. In particular Keith has done a lot of interesting work around Universal Income over the years….and it’s great to see him out there with this.

    • Draco T Bastard 13.2

      Well, that does seem to be this governments reaction to the GFC. Cut taxes, borrow heaps and hope like hell that things come right through the magic of the market.

  14. Huginn 14

    Here is a similar conclusion from the IMF

    ‘. . . the evidence from the past is clear: fiscal consolidations typically have the short-run effect of reducing incomes and raising unemployment. A fiscal consolidation of 1 percent of GDP reduces inflation-adjusted incomes by about 0.6 percent and raises the unemployment rate by almost 0.5 percentage point (see Chart 2) within two years, with some recovery thereafter. Spending by households and firms also declines, with little evidence of a hand­over from public to private sector demand.

    In economists’ jargon, fiscal consolidations are contractionary, not expansionary. This conclusion reverses earlier suggestions in the literature that cutting the budget deficit can spur growth in the short term.’


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