Fiscal austerity begins to bite, slowly, almost everywhere in the developed world. Recent data about gross domestic product (gdp) show that the contribution to growth from public sector consumption (the final consumption expenditure of general government, according the Eurostat definition, the same aggregate used by the St. Louis Fed to track internationally government expenses and gross investment) has slowed, zeroed or even become negative. Government expenses are somewhat volatile, in quarterly terms, so it is not easy to detect a trend, but a clearer tendency emerges in the annual numbers.
The data show that the public consumption share, relative to the total gdp, can be not so small in absolute term (16% in United States, 24.6% in France), but that its countercyclical (or even recessive…) direct effects can be insufficient (or limited). In a sense, it is very misleading to speak about “Keynesian policies”: John Maynard Keynes imagined a stronger shock on public investments during a crisis, big enough to offset the collapse of private investments, the real trigger (not necessarily the cause) of economic cycles.
The biting from austerity is already evident in troubled Euro zone countries. In Spain, for instance, public consumption subtracted 0.5 percentage points (p.p.) of growth in the 2011 (when the gdp expanded by 0.7%), it was insignificant in 2010 (-0.1% the gdp growth), and it added 0.5 p.p. in 2009 (-3.7%). Similarly, in Portugal public consumption subtracted 0.3 p.p. in the year ending in September 2011 (-0.6% the total annual gdp), added 0.2 p.p. in 2010 (+1.4%) and 1.0 p.p. in 2009 (-2.9%). Eurostat data for Greece are available only until March 2011, and they show that public consumption subtracted 1.7 percentage points form the annual rate (-5%), meanwhile it added 1.9 p.p. in 2009 (-2.3%) and 0.3 p.p. in 2008 (+1%). It is interesting that Greek public expenses grew very rapidly during the 2009 recession; but the results were very disappointing (maybe because of the already ugly shape of public finances).
Austerity is less evident in other countries. Even in problematic Italy, public consumption took away only 0.1 p.p. in both 2011 and 2010 (+0.4% and +1.4%, respectively, the growth gdp rates), and it added 0.2 p.p. in 2009, when the economy collapsed by 5.1 per cent. It is not the first time, for Italy: between '93 and '96, government consumption subtracted up to 0.7 p.p., while the gdp was growing at a 3% rate!
Public expenditure slowed in France (0.2 p.p. in 2011 from 0.6 in 2009) and in Germany (0.3 in 2011 from 0.6 in 2009), but its contribution is still positive. Outside the Euro zone, in United Kingdom – where austerity is a central topic in public debates – public consumption contribution to growth zeroed in 2011 (+0.8% the total gdp), from 0.3 p.p. in 2010 (+2.1%) and zero, again, in 2009 (-4.4); meanwhile in Usa general government expenses subtracted 0.2 p.p. in 2011 (+1.7%), and added 0.1 p.p. in 2010 (+3.0%), and 0.3 p.p. in 2009 (-3.5%). In Japan, finally, government expenditure contribution to growth has always been very small (0.1 p.p. in 2011 and 2010, 0.2 in 2009, 0.0 in 2008).
Government consumption, an aggregate which excludes unilateral transfers as social security or employment benefits, makes the only evident and direct contribution to growth generated from government expenses. So, when economists try to ascertain more lasting effects from public deficits, the results are very controversial. Many students argue that the multiplier – the ratio of a change in national income to the change in government spending that causes it – is one or less than one: that means that for every euro spent by the government, the lasting effect on income will be, at most, one euro. The main raison is, maybe, that monetary policy offsets the fiscal policy effects in order to avoid inflation (and that hints that, during a recession, the multiplier could be higher than in normal times: recent estimates seemed to lead to this conclusion). It is also possible that people themselves offset fiscal effects: for instance they can expect more taxes in the future and reduce accordingly consumption. In any case, is not impossible – the empirical evidence is very clear about that – to overcome the austerity effect. But "something" has to be done, instead: for instance to implement a really expansive monetary policy – very low interest rates could not be enough – or a currency devaluation or some targeted tax cuts. Structural reforms, when well designed, in a balanced way, can be important, but they operate with a lag.