Austerity: What does this mean for the United States?

Untangling Our Economy

The following key points address address the definition and key aspects related to the term and the impact on the United States. The following talking points were prepared by our allies at Public Notice.

What is Austerity?

• Austerity is typically understood as an attempt to reduce a government’s debt relative to the economy or to reduce deficits.  Though most people associate austerity with spending cuts, it can encompass spending cuts, tax increases, or a combination of both.

Top Line on Austerity

• Contrary to what many think, spending cuts have largely been lacking from austerity in Europe. Instead, austerity has mostly taken the form of raising taxes. And the evidence shows this simply isn’t the solution. When you raise taxes in a weak economy, bad things happen so we shouldn’t be surprised that Europe is struggling.
  • In fact, most European countries are spending more today than they did in 2008 before the crash.
  • While some countries like Greece and Italy have cut some spending they’ve undermined this effort by raising taxes at the same time. Meanwhile, countries like France and the U.K. have made no effort to cut spending, seeing spending increase most every year over the last decade.
• We’ve seen that countries that pursue the so-called “balanced approach” – a combination of tax increases and spending cuts—tend to fail while countries that pursue spending cuts alone, succeed. 
  • Real world examples show the “spending cuts only” approach is more likely to be followed by a period of economic growth – while the tax increase approach is more likely to lead to economic contractions.
    • Over the last few years, the Baltic nations of Latvia, Lithuania, and Estonia have significantly cut government spending without raising taxes. These countries have subsequently experienced economic growth, with Estonia seeing economy swing from shrinking 13% in 2009 to growing 3.1% in 2010.
    • Similarly, Sweden reduced welfare spending and cut taxes and has seen its economy become one of the fastest growing economies in Europe.

What Do the Elections in Europe Mean for the U.S.?

• Earlier this month, citizens in Greece and France voted to rebuke to politicians of all parties.
  • In Greece, politicians tried to solve their country’s problems through both tax increases and spending cuts.  In France, they tried to solve their problems with new taxes.
• The election results in Europe should send a message to politicians in Washington.  Voters showed their frustration over, among other things, stagnant economies and high unemployment.
  • The fact remains that most Americans (54 percent) say the national debt is extremely important to them, and 79 percent say the level of overall government spending is extremely or very important to them.

What happened in Europe?

• In most of the cases in Europe, austerity took the form of large tax increases and small, if any, spending cuts.
• In the UK, politicians have made a lot of promises to cut spending. But in reality, spending has continued to grow and fundamental structural reforms (pension reform, health care reform, etc) have been put on hold. A scenario simultaneously being played out in the U.S.
  • They also increased taxes, including the Value Added Tax, tax on capital, the top marginal personal income tax rate, and raised other duties.
• In France, politicians haven’t even really talked about spending cuts. They merely increased the retirement age from 60 to 62, while also increasing the Value Added Tax, and are even talking about increasing personal income taxes and business taxes.

What does this mean for the United States?

• Government spending in the United States is unsustainable, but we still have time to avoid a similar fate as Europe. We should pay attention to the lessons in Greece and reduce government spending now before we reach that point.
  • Greece’s debt relative to the size of their economy is 160%. The United States’ debt relative to the size of our economy surpassed 100% this year. How high does it have to go before Washington takes action?
• There is a lot of talk about the so-called “balanced approach” to deal with our financial problems. But as research shows, and as many European countries now demonstrate, raising taxes to pay for out-of-control, unsustainable spending fails to reduce debt and threatens to harm economic growth.
• So what we can we do? The bulk of the evidence in Europe clearly shows we must focus spending cuts now. Delaying spending cuts now will only make it harder in the future.

---

Tags: Austerity, Europe, United States, Greece, attempt to reduce, government debt, the economy, reduce deficits, spending cuts, tax increases, To share or post to your site, click on "Post Link". Please mention / link to the ARRA News Service. Thanks!