Tuesday, May 8, 2012

Give us austerity, but not yet: Governments in the rich world have mostly run deficits over the past three decades

May 8, 2012

It is appealing to imagine that there is a lovely painless alternative to austerity in Europe, if only the stubborn politicians would choose to follow it. François Hollande encouraged this notion during his presidential campaign, stating that he was for growth and against austerity as if that were the choice on offer. Greece's voters, by now well into a recession that could last for years, would dearly like an alternative. Unfortunately this idea rests on a rather heroic assumption: that countries can spend big now, running up large budget deficits to make up for lacklustre private-sector demand, then rein in that spending a few years down the line when the worst of the crisis has passed. The first of these two charts uses a dataset that goes back to 1978 but only covers a relatively small number of OECD countries. The second chart is more comprehensive but considers a shorter timespan. Both suggest that, in good times as in bad, governments will find reasons to spend more than they receive in revenue.


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