The end of austerity is nigh - but not for the Eurozone

Jake Cordell
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It's time to spend again: Governments could be about to open the pursestrings. Just not if you're in the euro
It's time to spend again: Governments could be about to open the pursestrings. Just not if you're in the euro (Source: Getty)

Governments around the world could be nearing the end of austerity, as stable borrowing and low interest rates reduce the need to hack into spending or hike taxes.

According to Capital Economics' public finance tracker, "fiscal policy in advanced economies is looser this year than last, and may well be eased further in the years ahead.

"Austerity may well be over," its global economist Michael Pearce added.

In the UK, the Brexit vote has triggered a new wave of looser policy, with Theresa May signalling the end of plans to balance the books by the end of the decade and new chancellor Philip Hammond preparing to spend up to £10bn a year more than his predecessor had planned, according to Capital Economics.

In other advanced economies, such as Japan, policymakers are preparing to unleash a big round of fiscal stimulus to support the recovery, while in the United States tumbling government borrowing costs have given Barack Obama and his successor even more leeway.

Furthermore, debt levels as a proportion of GDP have stabilised since the crisis. Taking Japan out of the picture, economists said advanced economies could loosen the pursestrings - spending more or cutting taxes - by an average of 0.5 per cent of GDP compared to current plans without causing debt to jump.

However, in the Eurozone - "the region where austerity has had the most damaging effects on growth [and] where there is a clear case for greater fiscal stimulus" - austerity may well endure for political, not economic, reasons, Pearce warned.

Read more: What does Brexit mean for the public finances?

With the bailout programme in Greece reaching a new stage earlier this summer and the EU "planning to impose fines on Spain and Portugal" for missing budget targets, the Eurozone may have to wait a little longer before belt-tightening comes to an end.

Even in Germany which has "ample scope to loosen policy", according to Capital Economics, "the government has a strong incentive not to do so in order to set an example to indebted peripheral countries."

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