In 'fiscal cliff' deal, an austerity path akin to Europe's

Brad Plumer / The Washington Post /

Published Jan 6, 2013 at 04:00AM

Economists such as Paul Krugman for years 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.

But after last week’s “fiscal cliff” deal, the United States is on pace to enact about as much fiscal consolidation this year as many European nations — and more than Britain and Spain.

A back-of-the-envelope calculation suggests Congress has enacted about $304 billion in tax hikes and spending cuts for the coming year, an austerity package that comes to about 1.9 percent of gross domestic product. 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, as well as the $50 billion in scheduled cuts to discretionary spending from the 2011 Budget Control Act. It includes $24 billion in new health-care reform taxes and $27 billion in new high-income taxes, as well as about $78 billion from the delayed sequester cuts — assuming that these either take effect or are swapped with other cuts.

Of course, the U.S. would be facing much, much more austerity if Congress had done nothing about the “fiscal cliff” and all of the Bush-era tax cuts had expired. But even after the deal, we’ve still got the payroll tax increase and an array of spending cuts coming. Economists expect them to exert some drag on the economy, even if it’s unclear how much.

So how does the sheer scale of the U.S. austerity program for 2013 compare with what European countries have been doing in the past few years? We can get an approximate sense by looking at data from the European Trade Union Institute on the size of Europe’s various fiscal consolidation programs.

Britain has earned a lot of criticism for its austerity programs. But each of those two deficit-reduction years were smaller than what the United States is planning this year. The U.S. 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, Portuguese or Irish levels of austerity.

It’s also possible to draw very different conclusions. One could argue the U.S. is about to repeat Europe’s mistake of “premature austerity.” Alternatively, one could say the U.S. is in a better position to begin trimming its deficits than Europe because the U.S. economy is healthier, and we also have an aggressive central bank.

Either way, Congress is starting to tighten fiscal policy. Most economists say there’s not going to be a big cliff-induced recession, but there will probably be a partial drag.

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