Wednesday, October 20, 2010

No, Really, This is Not A Good Time For Austerity Measures

Over the last few months, I've been documenting evidence about how universally bad the idea of austerity is. See here, here, and here. There is a time to cut spending, and there is a time not to cut spending. This is a classic example of a really bad time to cut spending:

Austerity measures aimed at bringing down Portugal's towering budget deficit are crucial to regain creditor confidence, Finance Minister Fernando Teixeira dos Santos said Saturday, while also acknowledging that they will slow down economic growth next year.

Measures contained in the government's 2011 budget proposal are intended to "not only reduce the deficit, but will also regain the confidence of those who lend to Portugal," Mr. Teixeira dos Santos said at a news conference explaining the proposal, which the minority government late Friday had presented to parliament amid continued uncertainty on its approval.

The government expects gross domestic product in Portugal to recover by 1.3% this year, but the harsh austerity measures included in the proposal will contribute to a slowdown in GDP growth to 0.2% in 2011, Mr. Teixeira dos Santos said, because the measures will have an effect on domestic demand.

The government's growth forecasts are still slightly above those of the Bank of Portugal, which said last week that it expects a GDP expansion of 1.2% this year, and a stagnation next.

Prime Minister Jose Socrates had earlier proposed a series of harsh austerity measures for this year and next, aimed at cutting Portugal's budget deficit from 9.3% of gross domestic product in 2009, to 7.3% this year, and 4.6% in 2011. The goal is to reduce the spending gap to 2.8% of GDP in 2013.

So, a country that is barely growing is going to cut spending so that it can lower its already low growth rate to near 0%. In other words, the country is voluntarily inching itself toward a recession -- at a time when it is just getting out of a recession. This at a time when there is ample data from other countries that have tried austerity that this is not a good time (see links above) to engage in austerity.

And today, we have another story on the same topic, making the same point:

Britain will take an axe to its welfare state on Wednesday as part of an 80 billion-pound ($125 billion) cut in public spending that will dictate the future of both the economy and the coalition government.

After months of bitter negotiations, Conservative finance minister George Osborne will announce his spending review at 1130 GMT (7:30 a.m. EDT). Cuts of 25 percent on average are in store for most government departments outside priority areas.

Economists are split between those who say the drastic action is needed and those who argue it will tip Britain back into recession. Almost all agree, however, that growth will slow and the Bank of England (BoE) will have to keep monetary policy super-loose for the foreseeable future.