A demonstrator kicks the glass at the main entrance of "Palau de la Musica" during clashes following a demonstration during a general strike in Barcelona Spain, Wednesday, Nov. 14, 2012. Spain's main trade unions stage a general strike, coinciding with similar work stoppages in Portugal and Greece, to protest government-imposed austerity measures and labor reforms. The strike is the second in Spain this year.

Manu Fernandez, Associated Press - Ap

Is U.S. path similar to Europe's?

  • Article by: BRAD PLUMER
  • Washington Post
  • January 5, 2013 - 6:10 PM
Is U.S. path similar to Europe's?

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. Calculations suggest that Congress has enacted about $304 billion in tax increases 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 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 more austerity if Congress had done nothing about the fiscal cliff and all the George W. 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 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 criticism for its 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, The United States is nowhere near Greek or Portuguese or Irish levels of austerity.

However, these comparisons are far from perfect -- finding a common baseline is tricky, and not all austerity measures have an equivalent effect on growth. It's also possible to draw very different conclusions. One could argue that the United States is about to repeat Europe's mistake of premature austerity. Alternatively, one could say the United States is in a better position to begin trimming its deficits than Europe was, because the U.S. economy is healthier. (The U.S. central bank also has provided more aggressive monetary stimulus.)

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. JPMorgan Chase economist Michael Feroli estimates that the tax hikes and spending cuts that have survived the cliff deal could shave at least one percentage point off U.S. economic growth in 2013.

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