Spending your way out of a recession

The great majority of us had never spared a thought for topics such as GDP, growth rates or unemployment rates until we started to feel the pinch. Four years down the line of the financial crisis we are now all amateur economists with 101 views on how the global economy, and indeed the Maltese economy, should be chivvied along the way to recovery.

The first instinct, based on our experience at the personal and family level, is to decrease the amount of money we spend and in the meantime try to increase our income. That's what's happened since time immemorial - if the family budget is stretched, little luxuries are eliminated and one or two of the grown-ups in the family get a part-time job to earn more cash. It is basic economics but it is intuitive.

However, economists are at odds as to how to revive ailing economies; Keynesian economists (after the economist JM Keynes) claim that in such situations the government should actually spend more money to revive an ailing economy, while others claim that the way forward is austerity, to balance the books. Like every debate, it is highly unlikely that the solution lies squarely in one camp or another. It is more likely that both are right to some degree. Reasonable spending while holding back on excesses is probably the key to economic success, both in the good and the bad years.

What made me write my opinion piece about government spending was a CNN article I read online on the public health effect of Greece's austerity measures. The article describes the terrible effects brought about by the troika's insistence that Greece slash its healthcare spending by 40%, bringing down the country's expenditure on healthcare to 6% of GDP (as opposed to the UK's 8% and Germany's 9%). This cut led to a shocking 200% rise in HIV, given the excision of Greece's needle-exchange programme for drug addicts and an epidemic of malaria - yes, malaria in Europe! - after pesticide programmes had their budgets cut. Besides the human cost of such ill-conceived budget cuts, it simply does not make sense to cut corners in areas that can backfire in such spectacular ways. Back in the 1990s, New York City slashed some US$120 million from its tuberculosis prevention budget, only to end up having to fork out US$1.2 billion to pay for an outbreak of drug-resistant TB. Apparently the troika did not learn from New York's mishap!

I am of course not saying that governments should go on a spending spree like the ones of the 90s and early 2000s, which led to the mess we are currently in. Back then our government (along with most other governments in the developed world) basked in an economic growth spurt and spent like there was no tomorrow. The feel-good factor reigned supreme and trumped any other consideration. That is most definitely not what the doctor ordered. However the old adage 'prevention is better than cure' is one that we should always keep in mind when planning expenditure, and this does not apply only to healthcare but is true for various other sectors. Investing in education and welfare programmes, for example, is vital to foster a more productive society, which in turn produces a richer economy.

Countries in northern Europe have managed to weather economic storms very well with their typical Protestant economic responsibility, as opposed to the Catholic PIIGS (That is Portugal, Ireland, Italy, Greece and Spain... OK Greeks are Orthodox... but you get the gist). Estonia, for example, recovered quickly from its own economic recession, brought about by a real estate bubble a few years ago. It cut spending, keeping the debt level at a manageable 10% in order to join the Eurozone. The low level of debt enabled the country to keep investing and spending, while the recession was hitting Estonia's southern counterparts. The Estonians cut back state salaries and froze pensions, while our government gave state employees a pay rise without even suggesting an increase in productivity!

The epitome of fiscal responsibility must be Norway. I know the country is filthy rich. It was blessed with enormous amounts of gas reserves, which makes one wonder whether God is a Viking or a Catholic. The Norwegians have enough money to lead a lazy existence while living off their God-given bounty. But no, that is not the way of the responsible Norse. They save the money their country earns from oil and gas in a sovereign wealth fund. They know their gas reserves will not run out in the near future, but they are already preparing for when the inevitable happens. They even make sure that the companies they invest in behave in an ethical manner, as they don't want their wealth to be hurting other people. There are some people who claim that the Norwegian government might be going too far and some more spending might actually be good for them. But in a typical Scandinavian way, the Norwegians weigh all options and don't take decisions based on emotions or spur-of-the-moment decisions.

I am still trying to get to grips with the ins-and-outs of the European economic crisis, which thank God is showing signs of recovery. However, there is no doubt that it is neither austerity nor free-for-all government spending which is the secret to economic health, but fiscal responsibility. Spending is good when there is a good reason to spend. On the other hand, spending just to satisfy personal or national egos is a recipe for disaster.