The pain in Spain: Government debt could rise rather than fall if cuts go through
The debate rages in the Financial Times comment columns – should we continue the fiscal stimulus as the TUC argues, or cut the deficit as fast as possible, as the Coalition Government is doing? And it rages around the world. The latest paper from the US-based Center for Economic Policy and Research, “Alternatives to Fiscal Austerity in Spain”, argues that the pro-cyclical policies of cutting the deficit being followed by the Spanish Government, as advocated by the IMF and EU, could lead the Spanish Government’s debt to be higher than if the maintained their fiscal stimulus. The main argument – which the TUC believes also applies in the UK – is that the most important element of debt reduction is growth, and cutting Government expenditure will reduce or restrain growth, leading to more debt (due to lower tax takes and more state benefit expenditure, for example).