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In 2012, Spain's budget minister said the country was in the midst of "the biggest fiscal consolidation" since democracy started in 1977. This austerity included a 17-per-cent decline in government spending, surely enough to make Spain a test case for the philosophy that government retreat can lead to GDP growth. But by one reasonable definition, the Spanish government has actually engaged in more stimulus than austerity.
To the economically uninitiated, the best indicator of economic stimulus is probably the change in the size of the government's budget deficit or surplus relative to GDP. The larger the change, the more the government is making up for lost demand from the private sector.
By that measure, Spain's response to the 2008 financial crisis has been just about the most stimulative around. The country's deficit-to-GDP ratio rose by 13.1 percentage points between 2007 and 2009, according to International Monetary Fund statistics. That was more than in the United States, where the ratio increased by 10.6 percentage points. In Germany, France and Italy, the increase was a relatively modest 3 to 5 percentage points.
Judged by this perspective, Spain's subsequent spending cuts look relatively mild. Based on the latest IMF forecasts, the deficit is expected to shrink by 4.6 percentage points of GDP between 2009 and the end of 2013. In other words, cutbacks have reversed just a third of the crisis-stimulus. By contrast, the United States will have rewound two-thirds of the increase in deficit-to-GDP by the end of the year. For the euro zone's three largest economies, the reduction is between 74 and 83 per cent of the increase.
Economists, though, tend to use a more sophisticated measure of stimulus. They distinguish between government spending that is discretionary and the part that is dictated by existing policy. When an economy shrinks, tax revenue falls and spending on benefits rises. These "Keynesian" stabilizers help smooth the impact of the economic cycle.
By this measure, the increase in Spain's fiscal deficit was almost entirely automatic – falling GDP reduced tax revenue while higher unemployment increased the cost of the welfare state. Conversely, the subsequent modest reduction in Spain's deficit is actually quite severe. Without the government's intervention, the deficit would have risen well above the 10.3 per cent of GDP reached in 2012.
This more sophisticated approach has two flaws, however. First, it assumes that Spain's lost economic output will be recovered in future years. Second, it suggests that tax rates and welfare payments are set at levels that will deliver a balanced budget over the course of the economic cycle.
In Spain's case, the government was geared to a time of exuberance. Now it must adjust to an economy without a housing bubble, a construction boom, and ample credit supplied by foreigners. Similarly, the especially large U.S. and U.K. deficits may be a sign that automatic stabilizers are actually out of step with the potential size and real needs of the economies.
In the professional vocabulary, a large portion of the current deficits may be structural rather than cyclical. In that case, lower deficits are not really austerity, but a necessary recognition of reality.
The stimulus-austerity debate should be viewed in this context. In practice, it is a bitter argument about what proportion of current or proposed deficits is a helpful Keynesian bulwark against the economic cycle, and what portion maintains or increases a disruptive structural imbalance.
But the bitterness hides a broad intellectual consensus. Almost all proponents of austerity would admit that the rapid automatic increase in budget deficits after the collapse of Lehman Brothers helped keep recession from turning into depression. And few stimulus fans would advocate persistent structural deficits, at least in the long term.
The inability to identify confidently the cyclical and structural portions of current deficits tends to narrow the debate. Austerity fans never want more than modestly smaller deficits, and they are usually willing to wait: the Spanish government is about to receive an extension to its deficit-cutting deadlines. Meanwhile, stimulus fans rarely argue for more than a modest increase in deficits, and then always with the proviso that borrowing should eventually fall.
For all the heat it generates, the narrow debate is sterile. No austerity program under serious consideration will start a spiral of deflationary decline. Likewise, no plausible stimulus program will be large enough to have more than a marginal effect on GDP growth.
Economists should stop bickering and move on. There are better uses for the profession's intellectual energy: most notably, trying to create more jobs. That would be a debate worth having.