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U.S. now on pace for European levels of austerity in 2013

For years now, economists like Paul Krugman have been criticizing countries in Europe for engaging in too much austerity during the downturn — that is, enacting tax increases and spending cuts while their economies were still weak.

Coming to an American street near you. (AP)

But after this week's fiscal cliff deal, the United States is now on pace to engage in about as much fiscal consolidation in 2013 as many European nations have been doing in recent years — and more than countries like Britain and Spain.

A back-of-the-envelope calculation suggests Congress has enacted around $304 billion in tax hikes and spending cuts for the coming year, an austerity package that comes to about 1.9 percent of GDP. (That's merely the size of the cuts and taxes; it's not necessarily the effect on growth.)

This includes the expiration of the payroll tax cut, which will raise about $125 billion this year. It includes $50 billion in scheduled cuts to discretionary spending from the caps in the 2011 Budget Control Act, as well as $24 billion in new Obamacare taxes and $27 billion in new high-income taxes. It also includes about $78 billion from the now-delayed sequester cuts — assuming that these either take effect or are swapped with other cuts.*

Of course, the United States would be facing much, much more austerity if Congress had done nothing about the fiscal cliff this week and all the Bush tax cuts had expired. But even after the deal, we've still got the payroll tax increase and an array of spending cuts coming down the pike. Those aren't minor. And economists expect them to exert some drag on the economy, even if it's unclear exactly how much.

So how does the sheer scale of the U.S. austerity program for 2013 compare to what European countries have been doing over the past few years? We can get an approximate sense by looking at this paper from the European Trade Union Institute on the size of Europe's various fiscal consolidation programs. A few comparisons:

Data: European Trade Union Institute, Chart: Brad Plumer

Fair warning: These comparisons are far from perfect—finding a common baseline is tricky, and not all austerity measures have an equivalent effect on growth. But a few broad points stick out.

Britain has earned a lot of criticism for its austerity programs in the past two years. But at a total size of 1.5 and 1.6 percent of GDP, each of those two deficit-reduction years were smaller than what the United States is planning this year. The United States is also planning to cut and tax more heavily this year than Spain did in 2010 and 2011. Or France. That said, we're nowhere near Greek or Portuguese or Irish levels of austerity.

Now, it's possible to draw very different conclusions from this chart. One could argue that the U.S. is about to repeat Europe's mistake of premature austerity. Alternatively, one could say that the United States is in a better position to begin trimming its deficits than Europe was, because our economy is healthier. (We also have a central bank that's providing more aggressive monetary stimulus.)

Either way, Congress is starting to tighten fiscal policy this year. There's not going to be a big cliff-induced recession, fortunately, but there will likely be a partial drag. JP Morgan's Michael Feroli estimates that the tax hikes and spending cuts that have survived the cliff deal could shave at least 1 percentage point off U.S. economic growth in 2013. We'll see how that prediction holds up.

(Hat tip to David Dayen, who first pointed this out on Twitter.)

*Update: I changed the spending cut numbers to reflect these 2013 estimates (pdf) from the Economic Policy Institute, so that there's no overlap between the effects of the discretionary caps and the sequester. That lowered the overall size of the austerity package slightly, from 2.1 percent to 1.9 percent.

Related: IMF: Austerity is worse for the economy than we thought



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Neil Irwin · January 2, 2013

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