THE word “austerity” entered the public discourse after the global recession punched a hole in public finances across the rich world. Governments scrambled to paint themselves as the most prudent, either to win votes (Britain), or to persuade their creditors that they could cut no more (Greece). But matching the rhetoric to the reality by measuring exactly how austere governments have been is not straightforward.
A simplistic approach would be to look at how much governments have managed to reduce borrowing (the difference between taxes and spending). But borrowing may change for reasons other than self-denial. In the middle of a debt crisis, ballooning spending on interest payments will mask efforts to squeeze public services or state pensions. By the same token, an economic recovery that nudges people off unemployment benefits and into jobs pulls down spending and boosts tax receipts, with the appearance, but not the pain, of austerity.
A better method is to look at changes in the cyclically adjusted primary budget balance—ie, the surplus or deficit after stripping out interest payments and temporary effects...Continue reading
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