Real austerity brings real growth. That’s the story of Estonia, which broke the common European mold of tax increase-based economic retrenchment by taking an axe to its public sector. Economic data for the third quarter just released last week indicated that the small Baltic state was the fastest growing in the Euro Area.
I explain in USA Today how Estonia has succeeded, as well as what America can learn from its success and the rest of Europe’s failures.
The Estonian government implemented an austerity program in 2009 composed two-thirds of spending cuts and one-third of tax increases. These were real cuts, too—cutting into public employee wages by 40 percent and slashing total government spending by 16 percent by 2011. Estonia’s economy contracted severely in 2009 but bounced back with 2 percent growth the following year and, for the past two years, has expanded more than twice as fast as that of Germany.
As America confronts its “fiscal cliff” of tax increases and spending cuts on Jan. 1, it risks repeating the mistakes of Europe [Estonia being the exception]. The folly of “austerity” composed mainly of tax hikes with less in the way of spending reductions has driven the economies of the Old World into the ground. We’re next unless Congress keeps Uncle Sam out of Americans’ wallets and takes a chainsaw to Washington’s budget.
Read the whole article here.