Tuesday, November 2, 2010

Topic of the Week : Austerity á là Mode

As the recovery takes hold in the developed economies of the world, much of the economic discourse has shifted away from stimulus and toward austerity. In essence, developed nations are beginning to face the daunting task of paying for the momentous wave of fiscal stimulus deployed since 2008.

The United Kingdom is a notable example, where David Cameron’s young government has recently released the details of an austerity plan that would cut deeper than Thatcher’s measures in the 1980s. However, there are valid concerns that significant fiscal retrenchment could cause the modest British recovery to stall.

The upcoming U.S. midterm congressional elections are likely to weaken Democratic holdings in the Senate and House, forcing the Obama administration to feature a stronger Republican voice in matters, such as the growing budget deficit and the burgeoning recovery. Increased fiscal discipline and a plan to tackle the country’s crippling debt will be central to a Republican legislative agenda, but the success and extent of any deficit agenda depends heavily the gains made this Tuesday.

Unfortunately, the United States is not likely to benefit from the experience of austerity programs, past and present, in other countries. Any serious U.S. fiscal reform package would have to directly tackle ballooning entitlement obligations, whereas the bulk of U.K. spending cuts will be felt in discretionary categories.

The United States also lacks significant flexibility in monetary policy, which Canada enjoyed during its fiscal reform in the 1990s. Canada had another key advantage when reducing government spending: It could rely on exports to make up ground lost in government expenditures. In addition, the IMF has voiced concerns that concerted austerity measures in developed economies could stunt the fledgling global recovery.
For more information, see our recent Special and International reports regarding austerity programs.

Full report: Topic of the Week : Austerity á là Mode

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