Politicians' Latest Austerity Fad Will Cause The Most Severe Contraction Of Economic Support In Decades

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During the crisis, arguments for stimulus spending seemed to have the moral high ground.Most major economies easily enacted stimulus programs back then and politicians who opposed supporting the economy with spending looked vulnerably irresponsible.

Yet thanks to Greece’s debt and spending crisis, the world has come around 180 degrees, says the Economist.

Now austerity is the latest economic fashion across the world. Promoters of austerity measures appear to have the moral high ground politically, and most major countries around the world are under pressure to remove government spending support from their economies. This could lead to one of the largest contractions of economic support, globally, in decades:

The Economist:

The trend has been most noticeable in Europe, where every big economy has spelled out spending cuts or tax increases in recent weeks. But it is evident everywhere. Japan’s new prime minister, Naoto Kan, has pushed a debate about raising the consumption tax to the top of the campaign for the upper house of parliament. In America, Congress’s fears about the deficit have thwarted the Obama administration’s efforts to pass a new mini-stimulus.

Until recently the deficit-cutting rhetoric exaggerated its likely short-term impact. Germany has long been one of the loudest proponents of the need for austerity. But its near-term plans (tightening worth 0.4% of GDP in 2011) are modest. Spain was the only big European economy forced by financial markets into immediate, tough austerity. Yet now Britain has chosen that route, with a budget that promises tightening worth 2% of GDP in 2011. The expiration of America’s stimulus implies a fiscal tightening of some 1.3% of GDP in 2011, a figure which could rise considerably if Congress prevented the extension of George Bush’s tax cuts. Much could change, but for now the rich world looks set for a collective fiscal adjustment worth around 1% of its combined GDP next year, the biggest synchronised budget contraction in at least four decades.

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