Austerity dogma goes down the debt hole

Fresh data showing the depth of Europe’s debt casts doubt on the wisdom of austerity during weak growth, and provides a reality check for Australia’s own budget debate.

The release overnight from Eurostat of updated budget deficit and government debt numbers for individual countries in Europe highlights the extent of the problems that most European countries are confronting as they strive for a decent rate of economic growth, yet at the same time work to move their fiscal position to a more sustainable level.

From an Australian perspective, the data from Europe puts some context around the budget debate and fiscal position locally and highlights the inflated melodrama that is being written about fiscal policy, the deficit and government debt in the lead into the budget next month. In Australia, even if this year’s budget deficit is $15 billion, which is near the top end of estimates, this would be the equivalent of around 1 per cent of GDP. With a deficit around this level, net government debt would remain around 10 per cent of GDP.

Have these figures in mind when considering the Eurostat data for what used to be some very wealthy countries in Europe.

For the whole of Europe, the total government budget deficit was 4.0 per cent of GDP in 2012, which followed deficits that averaged 5.9 per cent in the prior three years. The level of net government debt, on average, rose to 85.3 per cent of GDP. 

The aggregate budget deficit position was held sharply lower because Germany, the largest country in the Europe, recorded a surplus of 0.2 per cent of GDP. Germany was the only country out of 27 to register a surplus in 2012.

Small budget deficits were recorded in Estonia (0.3 per cent of GDP), Sweden (0.5 per cent of GDP) and Bulgaria and Luxembourg (0.8 per cent of GDP). Seventeen of the 27 countries recorded budget deficits above 3 per cent of GDP, with the highest being Spain (10.6 per cent of GDP), Greece (10.0 per cent of GDP), Ireland (7.6 per cent of GDP), Portugal (6.4 per cent of GDP) and Cyprus and the United Kingdom (6.3 per cent of GDP).

In terms of net government debt, no country has a ratio below 10 per cent of GDP. Estonia stands out with a net government debt to GDP ratio of 10.1 per cent, followed by Bulgaria (18.5 per cent of GDP), Luxembourg (20.8 per cent of GDP) and Romania (37.8 per cent of GDP).

It is striking that the net government debt to GDP ratios in the big countries within Europe are all above 80 per cent. Despite the budget surplus this year, net government debt in Germany is 81.9 per cent of GDP. The highest level of debt is Greece (156.9 per cent of GDP), Italy (127.0 per cent), Portugal (123.6 per cent) and Ireland (117.6 per cent).

It is easy to see why France (net government debt at 90.2 per cent of GDP) and the United Kingdom (90.0 per cent of GDP) are giving investors and ratings agencies concerns. The UK was downgraded by Fitch ratings agency just last week, partly due to the rolling recession but also these unsustainable levels of debt.

The raging debate in Europe over fiscal austerity, whose purpose is to cut budget deficits and reduce government debt, will no doubt continue on the basis of these problematic indicators. It seems that many governments within Europe, and the likes of the IMF, are no longer sure that when economic growth is weak, budget cuts and tax hikes do anything other than deepen the economic gloom and, counter-productively, make the budget position worse.

This is not to say that fiscal stimulus is necessarily the solution to the economic ills dogging much of Europe. The solution, as elusive as it might seem, is to have the economy grow in a sustained fashion so that jobs and profits can increase and then tax collections also rise. This is the problem taxing the minds of policy makers through Europe. More interesting, perhaps, will be the role of fiscal policy and how tight it should be once Europe is able to lock in a lasting recovery, even though this seems to be many years away.

If Australia had the fiscal and government financial position of the average of the European countries, the budget deficit would be around $60 billion this year having averaged around $85 billion in the prior three years. Net government debt would be around $1.275 trillion, not the $155 billion currently estimated for 30 June 2013.

While there is a lot to discuss about fiscal policy settings as Australia launches into the budget period next month, the size of the deficit and level of government debt are well down the list of worries. Just ask the Europeans.

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