The Debt Delusion. John F. Weeks

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СКАЧАТЬ United States (9/68) compared to the United Kingdom (12/68), though the former’s average of minus 2.2 percent was less negative than the latter’s minus 2.6. A reader might think that the high incidence of deficits reflects an Anglo-Saxon budgetary fecklessness compared, for example, with the prudent and frugal Germans.

      Such is not the case. Despite a reputation for practicing strict rectitude in public finances, “balancing the budget” comes as recent custom for German governments. Statistics do not go back so far for other countries but still cover several decades. In only six of the twenty-three years between 1995 and 2017 did the reunited German government run a budget surplus; four of them come consecutively at the end, 2014–17, and two were in the previous nineteen years. For the other large countries of the European Union we find similar non-implementation of spending equal revenue. During the period 1995 to 2017, the French and Italian governments had no surplus years, and the Spanish government had just three. Moving to the medium-sized European countries, the only ones with a substantial number of surplus years during the twenty-three years 1995 to 2017 were Finland (11) and Sweden (12). Beyond North America and Europe, the government of Japan has overseen continuous deficits since 1992.

By demonstrating the relative rarity of “balancing the books,” this brief survey of government budgets provides an operating definition of “fiscal austerity” or, more generally, “austerity policy.” It also suggests why governments of large countries have not practiced it until recently. Austerity is not merely the exercise of cutting or limiting the growth of expenditure. Many circumstances occur during which a government may decide to cut expenditures (or raise taxes). An obvious case presents itself when economic expansion results in inflationary pressures. When that happens, policies to increase tax revenue or reduce expenditure may prove the most effective way to contain those inflationary pressures. Limiting expenditure or increasing taxes are policy responses of “demand management” by the government for the specific goal of reducing inflation.

      After the global financial crisis of 2008, austerity came to mean a very specific public policy, the overriding goal of equating public expenditures to tax revenue. By “overriding,” I mean that achieving a “balanced budget” took priority over all other economic and social policies. A balanced budget was the alleged precondition for economic recovery and stability, without which national welfare would suffer harm far greater than the temporary deprivation caused by expenditure reduction. For example, reductions in US federal expenditure on unemployment compensation would cause short-term suffering to many households but, by leading to a balanced budget, would rejuvenate the economy as a whole and bring down the number of people without work.

      This programmatic framework found its selling rhetoric with the first famous and later infamous TINA principle: there is no alternative. A prominent invoking of this principle came with the prevention of widespread bankruptcies of financial corporations early in the global crisis of 2008–10. Several governments chose to prevent financial bankruptcies by recapitalizing the banks and other corporations, which were issued government bonds to replace assets rendered worthless by the financial crisis.

Financial corporations had made large volumes of high-risk loans, which the borrowers could not service once the crisis hit North America and Europe. In several countries, notably the United Kingdom, the United States and Spain, recapitalization prevented the collapse of entire financial sectors. The bonds that rescued private finance meant that the savior governments increased their debts – to save banks and corporations, governments generated budget deficits and accumulated debt. The government of Spain provides a striking case. In 2008 the Spanish public debt stood at a modest 47 percent of GDP, well below that of the putatively prudent German government, at 67 percent. The Spanish public debt ratio rose to 78 percent in 2011 and to 106 percent in 2013, with almost all the additional debt accumulated to recapitalize the private financial sector (numbers from the EU online database “Eurostat”). The growth in public debt involved no spending increase on public services. Those bonds rested in private balance sheets as replacement assets for bad loans made before 2008.

      By EU accounting rules, the issue of public bonds to private corporations counted as budgeted expenditures. Even though the Spanish government hardly increased its spending during the global crisis, the recapitalization of private finance resulted in a massive rise in the public-sector deficit. A budget surplus of 2 percent of GDP in 2007 became a deficit of 4.4 percent in 2008 with the first recapitalizations, then 11 percent in 2009, with an average of over 10 percent for the four years 2009–12.

These non-spending deficits created by recapitalization brought the Spanish government into conflict with the fiscal rules of the European Union. Those rules, subsequently made stricter, required corrective policies if public-sector deficits exceeded 3 percent of GDP and/or public debt rose above 60 percent of GDP. As nonsensical as it was, the TINA principle dictated imposing austerity policies on the Spanish government. “There was no alternative” to bailing out the financial sector, otherwise the entire economy would have collapsed. After the bailout, “there was no alternative” to imposing budgetary austerity because the public-sector deficit soared to unacceptable levels as arbitrarily defined in EU treaties (the Treaty of Maastricht, later incorporated into the Treaty on European Union and the Treaty on the Functioning of the European Union).

      An obvious alternative existed. In the early 1990s the Swedish financial sector faced imminent collapse. In response, the center-right government nationalized the banking sector, which involved no bailout (see “Sweden’s Fix for Banks: Nationalize Them,” New York Times, 22 January 2009). When the Swedish economy recovered, the government sold the nationalized banks back to private owners, realizing a profit on the sale. As a result, instead of the eponymous taxpayer funding a bailout, the public sector gained revenue via the bank “rescue.”

If, unlike the policy of the Swedish government, a bailout results in a nominal deficit in the public budget, alternatives to expenditure cuts and/or tax increases come easily to mind. The most obvious would be to work with a cash-flow budget, in which case issuing bonds for recapitalization would not count into expenditure, since the recipient banks must hold them as assets. The more fundamental alternative to austerity budgeting would be to reduce the deficit to GDP ratio through economic expansion – i.e., increase the denominator (GDP) rather than the numerator (the budget deficit). This policy approach features in our subsequent discussion.

      A final comment is necessary on the TINA principle as applied to public debt. Bank recapitalization in Spain, a free gift of safe assets to replace recklessly risky lending by private finance, was not without its element of black humor. Spanish private financial institutions used the recapitalization funds to speculate on Spanish government debt, which provoked a “sovereign debt” crisis by driving down bond values and inflating interest rates. To state it simply, the Spanish government saved the banks by giving them public bonds; and, returned to good health, the banks used their idle cash to speculate on the bonds that had saved them from collapse. This scenario justifies a combination of the old clichés “biting the hand that feeds you” and “no good deed goes unpunished.”

      This excursion into the unstable quicksand of the TINA principle leads to a working definition of budgetary austerity. As practiced across Europe and in the United States after the global crisis, the essential feature of austerity was to make a balanced budget the first priority for government economic management, even to the point of enshrining it as a legal requirement. By its own design, after the global crisis the Spanish government created an austerity “perfect storm”: an unprecedented recapitalization of banks resulted in unprecedented public deficits and debt under EU accounting rules; passage of a constitutional amendment requiring a balanced budget made the government legally bound to enforce draconian reductions in spending, during which time the banks that started it all enjoyed windfall profits on bond speculation.

Austerity in Practice

      We can now identify which governments have implemented austerity, in the specific sense of setting a balanced budget as their priority СКАЧАТЬ