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LETTER OF THE DAY - Austerity vs stimulus

Published:Friday | June 8, 2012 | 12:00 AM


It seems that there are two approaches to growth: reducing expenditure (austerity), or investing more money into projects with a return and production (growth by stimulus).

Following from the G8 meeting in Chicago this year, certain dividing lines were created between the self-proclaimed policies of Obama and Hollande which were described as pro-growth, and those governments who favoured austerity. Completely absent from any discussions was any sense that an attempt is being made to achieve austerity, as in Jamaica's case, or that supply-side efforts to spur growth after the crises subsided have yet to be tried, save some attempts at tax reform.

Lost is the idea that what is needed is more production, not more consumption. France's François Hollande outlined that his growth plan is reducing retirement to age 60 from 62, hiring 60,000 new teachers, and raising corporate taxes.

Stimulus means more government spending, which eventually turns out to be abused by governments or frittered away in crony pay-offs. Austerity usually means less spending and higher taxes. Then it turns out nobody wants to restrict spending, especially when the economy is crumbling because of higher taxes.


Yet some economists are stunned by the way austerity is pushed, especially when it is ill-advised. In 1929-1930, US Treasury Secretary Andrew Mellon demanded more austerity and fiscal management, which led to the Great Depression of 1930. He raised taxes and cut spending to balance the budget, which was immediately unbalanced because the unemployment rate was rising, and tax revenues were falling.

We need to formulate a policy yielding austerity and growth.

Lowering taxes will usually turn out to be revenue-neutral as a percentage of GDP. A flat-tax policy will repeatedly yield excellent results.

Asking for fiscal integrity from governments which are faced with 10-25 per cent unemployment is poor social and economic policy. Austerity may be the policy five or 10 years from now, but at this time it will weaken and depress the Jamaican economy.

New taxes will only result in increased government spending on frivolity and waste. Less spending should focus on providing necessary services in an efficient, low-cost manner.

Government employee head count should be reduced to whatever is needed to maintain essential services. Pay-offs and waste should be immediately eliminated. It is far easier to reduce government spending when the private sector is booming and jobs are available.

I am reminded that the Japanese leaders, after the Meiji restoration in 1868, discarded a code containing some 1,500 taxes and replaced it with a minimalist system that derived almost all revenue from a simple property tax. Most of the remaining revenue was raised by a tax on alcoholic beverages. The new Japanese leaders then eliminated unnecessary bureaucrats in one main purge. Sounds enticing?