Tuesday, 1 April 2014

Austerity again

I thought I might write again on Austerity again since Kruggers wrote  on austerity-memories.

We have seen Austerity measures ( defined as the public sector detracting from GDP) in Europe, the UK and indeed in the USA and here in Australia.

In every case the major effect of fiscal policy was to reduce GDP. Indeed in Europe it produced a recession.

Thus let us get back to basics. When are austerity measures good for the economy and when are they bad?

Keynes has been proved correct yet again. If a country introduce austerity measures when the economy is slowing then those measures exacerbate that slowing usually producing a recession.
If they are introduced during very good economic times then they enhance economic growth. Indeed in Australia we have seen two examples of this. The best example was in 1987 by Paul Keating. The other example was in 1996 by Peter Costello.

One thing Keynesian critics cannot understand is that a deficit can be contractionary. Wayne Swan's budget for the last financial year was in deficit but it was the most contractionary budget we have ever seen given our budget history. 
A Surplus budget can stimulate like Peter Costello's last budget's did.