Here’s one helpful graph from the OECD’s latest Economic Outlook. It shows the projected change in the “primary balance” of the world’s wealthiest countries between 2011 and 2013. (This is the deficit picture after excluding net interest payments on the debt.*)
(And yes, these forecasts could prove wrong. The OECD, for instance, seems to project that the United States will enage in a mix of spending cuts and tax increases in the next year — appearing to assume that Congress will let all of the various tax cuts expire at the end of 2012. That’s far from certain.)
Many economists, like Paul Krugman and Martin Wolf, have argued that countries like Europe are relying too heavily on austerity, period. They argue that attempts to tighten the budget during an economic slump will only hurt growth, which in turn makes it even harder for these countries to rein in their debt. See here for more evidence that austerity’s not working in the euro zone. Indeed, the OECD predicts that Europe’s economy will contract by 0.1 percent this year, and could even fall into “severe recession.”
Recently, by contrast, a few conservatives have started arguing that it’s not austerity per se that’s the problem — it’s just the type of austerity. In the National Review, Veronique de Rugy argues that many European countries are relying too heavily on tax increases to rein in their deficits. Per the OECD chart above, this especially describes Austria, Italy, Belgium, and the Netherlands. She argues, instead, that spending cuts combined with more stimulus from the central bank is the way to go.
But there aren’t many countries that have tried this route. Sweden stands out as one country that has cut spending a bit while enjoying a big monetary stimulus from the Riksbank. By contrast, there are plenty of euro zone countries that are leaning very heavily on spending cuts — especially Portugal, Greece, and Ireland — and they’ve had miserable economic growth. Austerity centered around spending cuts doesn’t seem to be working there. Then again, none of these countries are getting a big boost from Europe’s central bank, so perhaps that’s one relevant variable.
* Correction, the OECD is measuring “primary balance,” that is, what the deficit picture would look like if the country’s GDP was running at full strength without including interest payments on debt. This is a little different from the “structural deficit” variable that the IMF uses here. Apologies for the error and thanks to Tyler Cowen for pointing it out.