Skip to: Content
Skip to: Site Navigation
Skip to: Search


The Adam Smith Institute Blog

Can austerity trigger growth?

New research shows austerity can stimulate economic growth by calming bond markets, which lowers interest rates and promotes investment.

By Dr. Madsen PirieGuest blogger / July 7, 2010

Britain's Chancellor of the Exchequer George Osborne holds his Budget Box outside his official residence at 11 Downing Street in London on June 22. Osbourne said he'll cut government borrowing from 10 percent of GDP to 1 percent within 5 years by means of spending cuts.

Akira Suemori/AP/File

Enlarge

There's a new voice in the fierce debate about whether we need fiscal responsibility ahead of economic stimulus by government. It is that of Italian-born Harvard Professor Alberto Alesina. He has done empirical research on those countries which applied fiscal tightening, and which saw economic growth follow. He found nine good matches (and some non matches).

Skip to next paragraph

Recent posts

Alesina also uses psychological, as opposed to purely mechanistic, accounts of the dynamic response to fiscal tightening, arguing that economic players change their responses when they see governments making fiscal responsibility a priority.

Alesina argues that austerity can stimulate economic growth by calming bond markets, which lowers interest rates and promotes investment. In addition, he says, deficit-cutting reassures taxpayers that more wrenching fiscal adjustments won't be needed later. That revives their animal spirits and their spending. Alesina says that as a way to shrink deficits, spending cuts are better for growth than raising taxes.

This bears massively on George Osborne's decision to prioritize measures to cut the debt and the deficit, rather than follow the voices calling for more borrowing-induced government spending to sustain and boost economic activity. If Alesina is right, Osborne will be seen in retrospect to have made the right decision.

Add/view comments on this post.

------------------------------

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.