The Merriam-Webster online dictionary’s definition of austere is “giving little or no scope for pleasure”. In the economic sense austerity, according to Investopedia, refers to the following:
“A state of reduced spending and increased frugality in the financial sector. Austerity measures generally refer to the measures taken by governments to reduce expenditures in an attempt to shrink their growing budget deficits.”
In the United Kingdom in 2011, the government spent £711 billion. The year after, spending decreased to £683bn to top £720bn in 2013; an overall increase of about 1.7 percent in the last three fiscal years. The German Bundesbank estimates it will spend €302 billion this year as compared to €307bn in 2012, when expenditures went up by nearly 9 percent relative to the year before. French government spending hit a record high in 2010, then fell slightly for about a year until mid-2011. It then picked back up again to the point where, in the fourth quarter of 2012, it once again came close to the 2010 record level. The Dutch government has been on a spending spree for three consecutive years, going from €244.7 billion in 2011 to €245.3bn in 2012 and an estimated €260.9bn this year. The latter figure stems from before the €3.7bn bank bailout of SNS Reaal, by the way.
Now let’s move on to the most troubled (PIIGS) countries in the eurozone. Surely these countries have had to make deep cuts to their budgets, right? Wrong. The Italian government so far has reduced spending by a mere 2.2% compared to 2010 levels. In Portugal government expenditure has diminished somewhat in the last three years, but not even by 10%. The Irish government has not been much more frugal either. Though government expenditures in Spain have been on the decline for about two years, so far less than 7% has been cut relative to early 2011.
So what about Greece, arguably the most troubled nation of them all? As detailed in my previous blog post, the bloated Greek government has been bailed out several times since May 2010 yet most people would probably be surprised to hear spending has gone down by less than 17% since. I guess it’s a start but €1bn in cuts on a total budget of nearly €9bn is really not all that impressive. .
Across the Atlantic, the situation in the United States is not much different. The so-called “draconian” cuts represented by the sequester didn’t even make a dent in the size of government as its spending simply increased by less than had previously been projected. In other words, the government grew at a less rapid rate than the power-hungry bureaucrats had hoped it would. But it still grew.
Some people might argue that the riots going on in places like Greece have made harsh across the board budget cuts impossible, as to propose such a thing would be political suicide. That may be true. However, the question here is not whether such measures could conceivably take place without (more) massive social unrest. The only point I am trying to make here is that, perhaps except for Greece (though even that is pushing it in my opinion), there simply are no draconian unprecedented cuts to government spending taking place in any of these countries by any stretch of the imagination. Nonetheless, reports about so-called austerity and its alleged consequences abound in the media, despite the fact that even the strictest budget cuts – the Greek ones – amount to less than one-fifth the original budget and many a government budget is actually growing in size.
Bloated governments and their spending by definition extract capital – wealth – from the private sector. It is important to note that in the private sector any and all economic activity is subject to the laws of the free market, i.e. success is rewarded and failure penalized by you and me in the form of corporate profit and loss. In the public (government) sector, on the other hand, the exact opposite tends to happen; the more a particular policy wreaks havoc on the economy, the bigger the excuse for the State to usurp more power in an attempt to correct the unintended consequences caused by its very own policies.
The only way to reverse this trend and unwind the massive clout of government policies on the global economy is to free up resources by letting them flow back into the private sector. In order for the world economy to find its way back to real sustained growth we need to first see serious cuts in the size of governments everywhere.