“Austerity” has not prevented more taxes and more government, says a new study from the Institut économique Molinari (IEM)

Media release

Paris, Thursday, May 16, 2013 – Debate has been raging on the damaging effects of “austerity” measures in France, now officially back in recession, and in Europe generally. Many public officials and commentators have declared that austerity has gone too far and should be curtailed. More time should be allowed to meet the Maastricht criteria. But the issue has been distorted. Austerity is misconstrued and hides the fact that governments have continued to grow.

Austerity: no shortage of confusion

Austerity measures are intended to reduce government budget deficits and public debt as a percentage of GDP. In practice, “austerity” can thus cover all kinds of situations with differing economic impacts. The term can apply just as well to growth as to reduction in the size of government.

It seems to be widely agreed in this debate that austerity measures adopted in Europe have led to drastic spending cuts, coupled with some tax increases, the net effect being a downsizing of government. But is this really the case?

Austerity for taxpayers only: a 12.9% increase in government revenue

The deficit reductions observed in most countries have occurred because tax revenues went up faster than spending. That is precisely what the Eurostat data show, with revenues up 12.9% from 2009 to 2012, double the pace of the increase in public spending.

No austerity for European states: public spending up 6.3%

There has only been a modest 1.7-point decrease in government spending as a proportion of GDP in the European Union as a whole over the past three years. But the proportion is still four percentage points higher in 2012 than before the crisis started, 49.4% compared to 45.6 % in 2007.

In fact, government spending has never stopped rising in the Union as a whole since the start of the financial crisis, except in 2011 when it remained constant. Spending grew by 6.3% in the last three years, at a time when “austerity” policies were supposed to have been applied.

Austerity is a reality in Europe, but only for taxpayers. Most European states have not yet gone on a diet. “Confusion over the meaning of austerity impedes a better understanding of the situation and precludes a more relevant debate over the causes of the crisis,” says the study’s author, Martin Masse. However, the French people are ready for this debate, with 77% believing that the French state has not cut spending as it should (Ipsos).

The study “Is « austerity » responsible for the crisis in Europe?” is available on our website.

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The Institut économique Molinari (IEM) is an independent, non-profit research and educational organization. Its mission is to promote an economic approach to the study of public policy issues by offering innovative solutions that foster prosperity for all.

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Information and interview requests:

Cécile Philippe, PhD

Director, Institut économique Molinari

cecile@institutmolinari.org

+33 6 78 86 98 58