Demise of austerity Dan Kitwood/Getty Images

The Quiet Demise of Austerity

Objections to austerity were understandable after the 2008 financial crisis, when growth was languishing below 2% and sizeable negative output gaps suggested that overall employment would be slow to recover. But now the merits of austerity seem to have been forgotten just when it is needed once again.

LONDON – It has been several years since policymakers seriously discussed the merits of fiscal austerity. Debates about the potential advantages of using stimulus to boost short-term economic growth, or about the threat of government debt reaching such a level as to inhibit medium-term growth, have gone silent.

There is no mistaking which side won, and why. Austerity is dead. And as conventional politicians continue to take rearguard action against populist upstarts, they will likely embrace more fiscal-policy easing – or at least avoid tightening – to reap near-certain short-term economic gains. At the same time, they are not likely to heed warnings of the medium-term consequences of higher debt levels, given widespread talk of interest rates remaining “lower for longer.”

One way to confirm that an international fiscal-policy consensus has emerged is to review policymakers’ joint statements. The last time the G7 issued a communiqué noting the importance of fiscal consolidation was at the Lough Erne Summit in 2013, when it was still the G8.

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