Home > Uncategorized > Chronicles of the Second Great Depression (5). Changes in government expenditure and revenue. 5 graphs

Chronicles of the Second Great Depression (5). Changes in government expenditure and revenue. 5 graphs

from Merijn Knibbe
Main points. Though the ‘peripheral’ Euro countries, except for Italy, had the largest initial increases of their government deficits during the initial phase of the Second Great Depression, they often also knew the largest subsequent decreases. As a consequence, the total change of the deficit during the entire crisis up until 2011-IV in countries like Greece or Portugal or Italy was not too different from the total change in countries like Austria or Belgium or even Germany. Spain and Ireland are outliers, in the first case because of a disastrous decline in government revenue (compared with the other EU countries) and in the second case, as is well-known, because of large income transfers to the banks. Countries with a high initial surplus and or an AAA status or their own currency often knew larger increases of the deficit during the crisis up till 2011-IV which was mainly caused by an increase of expenditure. Hungary is an outlier because of a-typical transfers of household wealth to the state (well, maybe not that a-typical…). Despite the remarkable success of countries like Greece and Italy there are at present no signs that ‘confidence’ has returned; countries which much larger increases in their deficit but their own currency seem to suffer much less from financial turmoil than the peripheral Eurozone countries

Some meta. During the first phase of the Second Great Depression, government deficits in the EU increased with about 6,7% of GDP +/-2%. This was intended to happen. ‘Automatic stabilizers’, like social security for the unemployed, were supposed to stabilize the economy. And it worked. Government expenditure increased. And according to a very rough estimate of three economists on Voxeu, GDP would have declined with about 20% without these stabilizers (link will be added, Voxeu is having a makeover at the moment of writing this). But what happened subsequently? And how much did government expenditure increase and/or decrease? And what happened to government revenues? In a number of previous blogs I’ve looked at government deficits (which, in the EU, are relatively small in most countries and which, in the EU, declined quite fast after the first phase of the Second Great Depression). In this blog, I’ll show the development of government expenditure and revenue. The main ‘analytical’ tool is a distinction between the first and the second phase of the crisis, which can differ per country. The fist phase is supposed to have started when quarterly government deficits started to increase, compared with the same quarter one year before, and is supposed to have ended once government deficit started to decrease again, compared with one year before.

The graphs. There are five graphs:

1. The deficit before the crisis and the maximum deficit
2. The increase during the first phase and the subsequent decrease (until 2011-IV)
3. The increase of government expenditure during the first phase and the subsequent decrease (in some countries: increase)
4. The decrease/increase of government revenue during the first phase and the decrease/increase during the second phase
5. The increase/ decrease of revenue as well as expenditure during the entire period

C = core Euro country, P is peripheral Euro country, NE is a non-Euro country, Lithuania and Latvia are classified as peripheral countries

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