The Truth About Taxes and Spending in Europe (What the countries in crisis have in common)

RCP ^ | 04/05/2013 | Alan Reynolds

[SeekAndFind]

Several European countries, including Cyprus, have been mired in economic stagnation or decline for five years or more.

Yet other countries in Asia and Latin America have flourished. What are the weakest economies doing wrong? What are the strongest doing right?

Economist Jim O’Neill coined the acronym BRIC in 2001 to refer to four economies which showed great potential then and now — Brazil, Russia, India and China. More recently, he added four more promising MIST economies — Mexico, Indonesia, South Korea and Turkey.

In mid-2008, The Economist magazine drew a sharp contrast between the booming BRIC economies and four feeble PIGS — Portugal, Italy, Greece and Spain. By 2010, after Ireland and Great Britain bailed out their banks, that unkind acronym was stretched to PIIGGS.

All PIIGGS have two things in common. First of all, government spending grew dramatically — from an average of 43.2% of GDP in 2007 to 52.6% by 2010.

Spending was modestly trimmed by 2012 in a few cases, yet the ratio of spending to GDP still remained 3 to 6 percentage points higher than it had been in 2007.

This sad story was repeated in Cyprus, where government spending soared from less than 34% of the economy in 1995 to 47% in 2010.

Despite this explosive growth of government spending among the PIIGGS, economist Paul Krugman’s End the Depression Now! somehow attributes southern Europe’s slump to “frantic, savage attempts to slash spending.”

In a recent New York Times column, Krugman suggested that Ireland suffers from grossly insufficient government spending, and contrasted Ireland’s alleged penny-pinching with “the true economic miracle that is Iceland … (which) thanks to its embrace of unorthodox policies, has almost fully recovered.”

[SeekAndFind]

Here's what happened in Iceland (in contrast ):

In Iceland, which didn’t throw taxpayer money at the banks, government spending was slashed from 57.6% of GDP in 2008 to 46.5% in 2012. The deficit fell from 12.9% of GDP to 3.4%. The economy began to recover in 2011.

Iceland’s economic boost from fiscal frugality was neither unorthodox nor unique. After all, the U.S. economy boomed in the late 1990s when federal spending was cut from 22.3% of GDP in 1991 to 18.2% in 2000. In Canada, total federal and provincial spending was deeply slashed from 53.2% of GDP in 1992 to 39.2% in 2007 with only salubrious effects.

[BitWielder1]

Trying to boost the economy by raising taxes is like trying to accelerate a car by pressing harder on the brake pedal.

[Straight Vermonter]

After all, the U.S. economy boomed in the late 1990s when federal spending was cut from 22.3% of GDP in 1991 to 18.2% in 2000.

That's a bit misleading as GDP growth accounts for all of the change not cuts. US spending actually increased almost 23% in the 6 years between 1995 (the GOP takeover of Congress) and 2001. Of course that looks great when compared to the Bush era when spending increased 23% in just the first 3 years.

[TheOldLady]

Click a Fist!!       Thank you, Mr. Laz A. Mataz

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He would win, you know…

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[DManA]

It is so simple. A dollar in private hands growns. A dollar in government hands shrinks. So if the government share of an economy grows everyone gets poorer.