In some nations such as Ireland or Greece, austerity measures, ie. sharp government spending cuts, have failed to calm debt concerns, and even made them worse according to Moody’s last month in Ireland.
This is because while planned government spending may have come down thanks to austerity, spending cuts have increased worries about weak economic growth (or a deeper contraction in the case of Greece), which reduces government tax revenue.
In the U.K. however, spending cuts appear to be working as they were supposed to, even according to Moody’s:
“Moody’s say that their stable outlook for the UK’s AAA credit rating is driven by the action to cut the deficit, and that reducing spending is more likely to bring down borrowing than relying on tax rises.”
Moody’s central scenario – on which the Aaa rating is premised – is that the UK economy will maintain a moderate pace of growth over the medium term, that the primary budget balance will be in surplus by around 2014, and that the restructuring of the country’s banking sector will only incur small additional costs.
A surplus by 2014? This would truly be amazing if it can happen. In the U.S., budget surpluses don’t even seem possible anymore, given that most talk is of reducing, rather than eliminating, the government’s budget deficit.