Austerity

What Austerity Looks Like in 2013: Taxes Up 14%, Spending Down 4%

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The Congressional Budget Office (CBO) has run the numbers for the first nine months of fiscal year 2013, which started on October 1, 2012. The results?

Receipts From October Through June: Up by 14 Percent Compared With Collections During the Same Period in Fiscal Year 2012

Outlays for the First Three Quarters: Down by 4 Percent (Adjusted for Timing Shifts*) Compared With Spending During the Same Period in Fiscal Year 2012

In dollar amounts, spending is down year over year by $119 billion so far while tax revenues are up by $263 billion. (*: "Timing Shifts" refers to quirks of the calendar, such as when estimated tax payments and payrolls fall; adjusting for them ensures that year-over-year comparisons are accurate.)

Remember the boasts that President Obama used to make about cuting $2.50 in spending for every new dollar of revenue? Or when Republicans would talk about keeping spending flat or declining while holding the line on taxes? Forget about all that. Instead, the first nine months of fiscal 2013 have seen a better than 2-to-1 boost in taxes versus spending cuts. CBO says the revenues hikes come from the end of the Social Security tax holiday and the bumps in rates that kicked in under the fiscal cliff deal back in December. The spending cuts are from the sequester.

The budget deficit through the first nine months of fiscal 2013 is $512 billion, which is good only in relation to the red ink spilled during the same period in fiscal 2012 (which totaled over $900 billion).

Here's a question for the anti-Austerians, those folks who say that the proper response to recessions and slow-downs is for the government to ramp up spending: Are they pissed off that the government is sucking 14 percent more out of an economy that is inevitably described as weak, shaky, and the like? They should be, since those dollars are not even going to supposedly stimulative activities.

As we've noted here before, there's good austerity and bad austerity. The good (read: effective at reducing debt-to-GDP ratios and not crashing an economy) focuses on cutting spending, liberalizing labor laws, reforming entitlements, and either keeping taxes flat or reducing their drag on economic activity. The bad (read: what has generally been tried in Europe over the past few years) involves raising taxes while increasing spending or barely trimming it. That one-two punch stretches out recovery by diverting money and decision-making out of the private sector where it's more likely to benefit more people. All austerity is not created equal and it's clear that austerity which relies on tax hikes more than spending cuts almost always comes a cropper. That's not to say that cutting spending will automatically boost economic growth (though it has at times), but there are real benefits to long-term economic growth to making the sort of structural reforms that form the core of successul austerity packages.

While we're talking spending, austerity, and debt-to-GDP ratios, it's worth revisiting the controversy from a few months back about "debt overhangs." According to economists Carmen Reinhart and Kenneth Rogoff, "debt overhang" occurs when the debt-to-GDP ratio is greater than 90 percent for five or more consecutive years. In a highly influential 2010 paper, Reinhart and Rogoff found that such episodes depressed future economic growth for years by -0.1 percent. In April, researchers affiliated with the University of Massachusetts at Amherst discovered a coding error in Reinhart and Rogoff's data, re-ran the numbers and concluded "the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent."

Which is to say that U Mass folks came up with numbers that correspond almost exactly to what Reinhart, Rogoff, and Vincent Reinhart found in their April 2012 paper, "Debt Overhangs: Past and Present." Looking at 26 debt overhangs in 22 advanced economies since 1800, "The authors find that on average, debt levels above 90 percent are associated with growth that is 1.2 percent lower than in other periods (2.3 percent versus 3.5 percent)."

Given that episodes of debt overhang last for decades - "20 of the 26 episodes lasted more than a decade," write Reinhart, Rogoff, and Reinhart, "and the average duration of debt overhang episodes in the sample is 23 years" - the cumulative loss in economic growth is "nearly a quarter below that predicted by the trend in lower-debt periods."

At the end of March, total debt-to-GDP (which includes debt held by the public and intra-governmental debt) was 105 percent.