The strategy to generate growth on the two sides of the Atlantic could not be any more different. The U.S. government is cutting taxes and raising government debt – hoping that increased spending will generate growth. European governments on the other hand are raising taxes, tightening their belts and actively lowering debt levels. This raises the question of whether fiscal irresponsibility or fiscal austerity is the right strategy to generate growth. There are strong arguments for and against fiscal irresponsibility. The critics argue that Americans will be paying heavily for the deficit later while supporters say that deficit financed public investment can create a “virtuous” circle whereby public investment spurs growth, in turn improving the budget outlook. The fiscal austerity agenda risks creating a “vicious” circle in which austerity slows growth, necessitating further austerity.
This argument is as much about politics as it is about economics, but I think Winston Churchill said it best –
“For a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
What do you think?