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The Progressive Economics Forum

Fiscal Austerity and Growth

This may come as a bit of a shock to Andrew Coyne and Jim Flaherty, but even the IMF are warning in their most recent fiscal policy update that  austerity in the advanced economies is going too far, and will dampen growth.

Indeed, they even suggest that too much austerity may spook the dreaded bond markets.

“Further declines in cyclically adjusted deficits could be undesirable not only from a growth perspective, but possibly from a market perspective as well. While smaller deficits and debt ratios do lead to lower borrowing costs, other things equal, advanced economies with faster output growth are also currently benefiting from lower spreads.  This likely reflects in part concerns about the feasibility of fiscal consolidation and solvency in an environment of very weak growth.Thus, further tightening during a downturn could exacerbate rather than alleviate market tensions through its negative impact on growth.”

Figure 3 shows that countries with the largest discretionary reductions in their deficits (negative changes in the cyclically adjusted budget balance) will have the slowest rate of growth in 2012.

And Figure 4 shows that countries with the highest growth rates will enjoy the lowest interest rates.

The IMF estimate the change in the all government Canadian cyclically adjusted budget balance to be minus 0.6% of GDP between 2011 and 2012, and minus 0.7% between 2012 and 2013. In plain language, that is the change in the balance due to spending cuts (or tax increases, though I don’t see any on the horizon.)  Earlier IMF work suggests that a minus 1% change of GDP in the balance implies a o.5% increase in the rate of unemployment.

The  IMF estimates likely do not fully reflect the scale of pending cuts in the coming round of federal and provincial Budgets.

Finally, one has to be more than a bit puzzled why the IMF staff are issuing such useful reports, while other IMF staff are actively engaging in imposing draconian and self-defeating austerity programs.

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Comments

Comment from Paul Tulloch
Time: February 24, 2012, 10:38 am

It does make you wonder why the IMF says one thing and then acts in a completely opposite manner. Is that like, institutional schizophrenia? I do wonder very very deeply what the outcome of Europe Union will be. As Roubini and a few other commentators mentioned, nobody seems to have the willingness to dig into the real problems of the EU accept for the austerity “solution”. Nobody is willing to look at balancing trade flows and balance of payment. Why not have an equalization program like we have in Canada with the provinces. Other than forcing half of the competitive companies operating in the EU to create a symmetrical production capability, I am unsure of how one achieves a workable- proxy for balance of wealth generation.

I know they mention somekind of transfers in the next bailout but this comes with the nasty price of massive austerity on the imbalanced flows. And that will only make these flows even more unbalanced.

Comment from Paul Tulloch
Time: February 24, 2012, 12:07 pm

http://www.theglobeandmail.com/news/politics/economists-to-ottawa-put-sales-tax-on-food-scrap-taxes-elsewhere/article2349106/

Okay so I ask progressive economists here, would you classify regressive tax policy as austerity.

Can you imagine two Canadian economists, in the height of these polarized times calling for sales taxes to include FOOD. Holy F$%K the right wingers in this country are F(*#ing insane. We have corporations sitting on billions of dollars, and we just gave them massive tax breaks and now we have these idiots like JAck Mintz saying we need to tax food. Wow, you want to talk about inciting the occupy movement against the 1%. And this guy taught HArper everything he knows.

Gees I need to go back to school and get my PHD, anybody want to contribute to my education fund so I can go back?

Man oh man I have just never felt so completely pissed off at the right wing nut jobs in this country as I do at this moment. And the globe actually printed those ideas? Makes you wonder if we will not see something like this in the upcoming fed budget. Would anybody be surprised if Harper did?

Comment from So and So
Time: February 24, 2012, 3:24 pm

From Bill Mitchell’s blog:

The lesson for the Europeans is that the US fiscal stimulus worked

http://bilbo.economicoutlook.net/blog/?p=18363#more-18363

Comment from Marko
Time: February 26, 2012, 1:03 am

This short essay (Dec. 2011 ) from the Director of UNCTAD also does an excellent job of dissecting the arguments of the “austerians” :

http://www.unctad.org/en/docs/presspb2011d12_en.pdf

Comment from Paul Tulloch
Time: February 26, 2012, 9:34 am

Just want to say- if you do some fairly advanced calulations involving tax modelling, you will derive a proof, that the only way possible to overcome this crisis, is to increase good jobs and the tax revenues plus the cost savings associated with decreased transfers combined with increased corporate taxation, from both productive and financial investment, and a more progressive tax base will leave you with a mathematical proof that maximizes social wealth.

Do the calculus, and it maxmizes stability, wealth, and distributional aspects.

Basically austerity, is admitting actually existing and even more to the right capitalism does not work and i have the mathematical proof.

Comment from T Manderly
Time: March 3, 2012, 8:38 pm

Cuts Will Kill Economy
Open Letter to Premier McGuinty from Top Canadian Economists

Premier if you cut public spending now you would completely destroy Ontario’s economy.

Signed,
Concerned Canadian Economists

Comment from T Manderly
Time: March 10, 2012, 2:28 pm

Is everyone getting everyone they know to raise these issues with their provincial and municipal politicians…?

It seems like many cities and provinces are considering austerity which would make the economy way worse for our middle class recession…

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