27 Jul 2013

Government Expenditure and the Long recession

This is a very interesting chart from the IMF's World Economic Output Report (April 2013).

What is shows is that in most cases, and certainly in the UK, government expenditure was only slightly above average leading up to the recession (USA being the exception and they were fighting two major overseas wars). Government expenditure seems not to be tightly correlated with the recession. Which is not what we'd expect if the government's rhetoric were true. Instead the figures contradict all the rhetoric about profligacy in the previous government - and yet the opposition seem unable to capitalise on this, but that's another story. These figures are what we'd expect if private debt were the driver of the recession, and in the years leading up to the recession various governments had begun to believe that their economies were now literally exempt from boom and bust (what we might call the Greenspan fallacy).

The thing to note however is that this recession is lasting a long time. And correlated with this is post-recession expenditure well below averages. That is to say that cuts in government spending are correlated with an extended recession. Of course correlation is not causation, but it would be very interesting to look more closely at this.

In the past governments generally continued to steadily increase their spending post-recession. In the world's advanced economies government spending is considerably below the average at present. In emerging market economies (the economies that are still growing at an appreciable rate) government expenditure is presently above average.

One of the factors is that government revenues have collapsed in this recession in a way that is almost unprecedented. With the debt fuelled economic bubble, government tax takes were high for a lengthy period and governments, especially the UK government, became complaisant about spending at boom levels. When the banks collapsed it was necessary to borrow a lot of money to prop them up, raising interest costs and decreasing the amount available to spend.

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Keep is seemly & on-topic. Thanks.