The USA, Greece, Portugal, Ireland and other Euro area countries have all cut their total public spending by more than the UK since the crisis struck. The USA has grown faster than the UK over the last five years, whilst much of Euroland has remained in a long recession for the same period. What can we deduce from this about austerity policies?
It is true that the spending cuts have been much larger in parts of Euroland than anywhere else. Irish total public spending is down by 15% in cash terms from the 2009 peak. Greek total spending is down by a bit more. In the USA total public spending fell marginally in cash terms in 2010 and in 2013, and was just 2.7% up in cash terms in 2013 over 2009, reflecting a real terms reduction. In comparison UK current public spending has shown real terms increases over each of those years and is up 13% in cash terms, 2013-14 compared to 2009-10. Total UK spending is up by 7.6% in cash terms, reflecting a substantial decline in capital spending resulting from Labour’s cuts at the end of its administration.
The Irish economy has just started to grow again after five years of falling output and serious problems. The further recent reduction in public spending has not prevented a small improvement. Meanwhile, in the UK public spending control is now tighter than in the period 2010-12, but output is now expanding much more rapidly.
The poor performance of the peripheral Eurozone economies has not been helped by very large public sector cuts, reducing employment incomes and other spending in the public sector. However, the bigger impact on their output has come in the private sector. The high exchange rate for their cost base has limited their ability to export or to substitute home production for imports. The lack of independent control over money means they have not been able to stimulate demand by monetary means as the USA and UK have. As a result the sharp fall in public sector output has not been offset by rises in private sector output, but reinforced by declines in private activity. High and rising unemployment has added to the misery and subtracted from demand.
Meanwhile, the better performance of the USA with tighter controls on spending, and the better performamnce of the UK now it also has tighter controls on spending, suggests that public sector spending controls do not prevent gr0wth. The private sectors of the USA and UK are able to expand, thanks to easy money policies. The US has also had the added advantage of early exploitation of shale gas, adding directly to output and making US industry more competitive thanks to cheap energy.