Did Iceland reject fiscal austerity?

by on June 13, 2015 at 3:30 pm in Current Affairs, Data Source, Economics | Permalink

Scott Sumner serves up the appropriate links.  He cites Mark Sadowski, who tells us:

…Iceland’s general government budget ran a surplus equal to 1.8% of GDP in 2014, or a change in fiscal stance since 2009 equal to 11.5% of GDP. This can be found on Table A1 of the April 2015 IMF fiscal Monitor.

…Table A3 shows that Iceland’s general government cyclically adjusted balance rose from a deficit of 10.0% of potential GDP in 2009 to a surplus of 2.7% of potential GDP in 2014, or a change of 12.7% of potential GDP…

But even this tends to understate the amount of fiscal austerity that Iceland has engaged in. This is because it includes the increase in spending attributable to rising interest payments on the national debt. To get a proper idea of the amount of fiscal austerity that Iceland has engaged in (i.e. cuts in direct spending and increases in taxes) one has to look at the general government cyclically adjusted primary balance which can be found in Table A4.  Iceland’s general government cyclically adjusted primary balance rose from a deficit of 6.9% of potential GDP in 2009 to a surplus of 6.2% of potential GDP in 2014, or a change of 13.1% of potential GDP.

…By this standard Iceland has done about 30% more austerity than Ireland, over double that of the UK, roughly two and a half times as much as the US, and approximately five and a half times as much as Latvia. The only country that has done more fiscal austerity is Greece.

None of this should come as a surprise. When nearly all the other OECD members were busy implementing fiscal stimuli in early 2009, Iceland (joined only by Ireland) was engaged in a massive fiscal consolidation.

Scream it from the rooftops: massive fiscal austerity in Iceland.  (Or should that be something like “gegnheill ríkisfjármálum austerity á Íslandi!”)  There is plenty more detail and argumentation in Mark’s post.  Here is my previous post on Iceland.

1 ThomasH June 13, 2015 at 4:07 pm

To know whether or not Iceland’s government indulged in “austerity,” we need to know both the government effective borrowing rate and the amount of expenditures with NPV greater than zero when discounted at that rate. Since it seems likely that the borrowing rate increased (and if anything expenditures with positive NPV might have decreased) a lower deficit would not be “austerity” but rater prudent fiscal management.

The “austerity” that people object to is the uninformed (or dishonest) kind that uses the deficit or the debt or some derivative of either as a “reason” to cut expenditures when expenditures have NPV greater than zero.

2 TallDave June 13, 2015 at 11:50 pm

The measure of austerity is the delta of deficit/surplus. How it got there may be interesting but doesn’t change the facts.

Also, NPV is a measure of cash flows, so the NPV of virtually all government spending is negative, even if we confuse taxes with revenues.

3 Cliff June 14, 2015 at 12:18 am

lol no. Nice motte and bailey argument but no

4 collin June 13, 2015 at 4:08 pm



Greece has a lot of austerity!

5 Sam Haysom June 13, 2015 at 4:38 pm

This is exactly the kind of anguished hair-pulling freak out response that Tyler admittedly trollishly sought.

6 ibaien June 13, 2015 at 4:40 pm

if ‘austerity’ means let the banks eat shit and raise VAT, top personal income, and capital gains tax rates, i’m fer it. if it means defaulting on pension obligations and fire-sale privatizing as many public goods as possible, i’m agin it.

7 Alain June 13, 2015 at 5:02 pm

I know. You want others to give you resources or to apply resources to your believies. I understand.

8 ibaien June 13, 2015 at 5:28 pm

if austerity is the cure, i want those who made the most money playing financial games to suffer the most and those who were made basic promises about social spending to suffer the least.

9 Sam Haysom June 13, 2015 at 5:50 pm

There was nothing basic about most governmental worker pension plans- that’s the problem. Exorbitant over-market pension plans were just as much finicial gimmicks as any thing you rail about. And they were ogeron times undertaken in connivance with the same bankers you despise- who managed the pension funds and who pour those funds into the stock market. But I can see how you prefer a simple morality tale. That’s always been a left wing weakness since the days Arthur Miller.

The only group that rivals bankers in the sleaze-off competition is public sector workers so don’t be surprised when you insulate them, and their trove of leftist votes (coincidence I’m sure) from suffering if no one is interested in your solutions.

10 ibaien June 13, 2015 at 6:03 pm

if ‘insulating them from suffering’ means keeping promises to the elderly that they’ll have a roof over their heads and more to eat than cat food, i’d be willing to take that hit. it has nothing to do with their voting records and everything to do with the social contract. do virtually all countries in the first world need to have serious discussions about what public sector work is worth, and how many workers are needed to do it? sure. does that take current governments off the hook for promises already made? nope.

11 Sam Haysom June 13, 2015 at 6:41 pm

Yes cutting back excessively generous pension plans is going to kick the elderly out on the street. Honestly, it is the elderly in this country that have the most assets and least debt. Stories about grandma eating cat food don’t work in a world where boomer largess has dug a gigantic whole for following generations. The social contract of this nation existed for centuries during which public sector unions were illegal at the state level. Appeals to social contracts are content free and completely unpersuasive. For instance I doubt you’d find a crack down on illegal immigrants tolerable because I appealed to the social contract.

What I don’t understand is why a successor government can raise taxes but not renegotiate pension plans. In both cases you are talking about increasing “suffering” and reneging on “promises” that previous governments made.

12 chuck martel June 13, 2015 at 7:34 pm

The public sector pension disaster wouldn’t exist if public sector labor was procured in a similar manner to other goods. When a government agency needs automobiles, paper clips, computers, etc., it takes bids and purchases its needs from the low bidder. Why should it be any different for labor? Public sector employees should have to bid for their jobs annually, the position going to the low bidder. If someone is willing to work without health and retirement benefits, they should be hired.

13 Mike W June 14, 2015 at 1:32 pm

The bailey: “i want those who made the most money playing financial games to suffer the most and those who were made basic promises about social spending to suffer the least.”

Retreat to the motte when challenged: “keeping promises to the elderly that they’ll have a roof over their heads and more to eat than cat food”

14 Mike June 13, 2015 at 5:24 pm

No, Tyler, you don’t understand:

If it works, it’s wasn’t austerity by definition. Even if you’re cutting spending drastically, it still isn’t austerity. Because if it was really austerity, it wouldn’t work.

By contrast, If it doesn’t work, it was austerity. Even if spending increased,it was still austerity. Because it didn’t work.


15 Cooper June 13, 2015 at 5:40 pm

Are you sure you don’t write a regular column for the NYT?

16 Alain June 13, 2015 at 9:16 pm


17 Yannick Jean June 18, 2015 at 9:30 am

And +2

18 meets June 13, 2015 at 5:39 pm

It won’t matter.

They never defined austerity and so will be able to redefine it for this case.

Or they will say “other stuff matters.”

19 Jess Riedel June 13, 2015 at 5:41 pm

> Scream it from the rooftops: massive fiscal austerity in Iceland.

In your last post, responding to liberal commentators who used Iceland as support for their preferred policy prescription, you put a lot of emphasis on several aspects of Iceland’s strategy not being generalizable. (You did note that some aspects were.) It would probably be sensible to explicitly defend the idea that austerity is generalizable, if that’s what you intend.

20 Sam Haysom June 13, 2015 at 5:54 pm

He’s counter-trolling the kind of people who were trumpeting Iceland’s “reforms” with this. It’s like when a certain species of left-wing hack spouts off about Republicans being the new Dixiecrats and a puckish conservative responds I can’t here you over Robert Byrd’s Klan rally speech. It’s a troll response to a troll argument.

21 Craig June 13, 2015 at 6:46 pm

You mean the Robert Byrd who died five years ago–that Robert Byrd? Yeah, I guess he’s still basically the voice of the Democratic Party.

22 Art Deco June 13, 2015 at 7:06 pm

He was in Congress for 57 years, was variously the Majority Whip, Majority Leader, and Minority Leader for 18 years, and was sitting on the four most consequential committees of the Senate at the time he expired; so, no, has only the most tangential connection to the voices of the Democratic Party.

23 Sam Haysom June 13, 2015 at 7:17 pm

Right an unpersuasive counter-argument for unpersuasive argument. I mean obviously you read what I wrote so how did you miss the part where I pointed out that it was troll argument

But obviously leftists are a lot more embarrassed about propping up the last of the Dixiecrats than I thought. If it’s any consolation I don’t think you are personally racist just eager to support racist as long as they support your political agenda.

24 TallDave June 13, 2015 at 11:33 pm

It wasn’t just the Dixiecrats, just a few years before FDR blacks were still not allowed at the Democratic national convention in any official capacity.

Usually the response to this is that the GOP didn’t do a very good job of protecting blacks from Democrats, which is true but has a bit too much in common with pleading for mercy on the basis of being an orphan at the trial for killing one’s parents.

25 David Wright June 13, 2015 at 5:44 pm

It’s really not possible for it to have been otherwise. For your country to not engage in austerity in a downturn, at least in real terms, you need someone outside your country willing to loan you money. Did no one on the other side of this argument notice that Iceland was cut off from international capital markets after their meltdown and default?

26 Martin June 13, 2015 at 6:04 pm


27 Nemo June 13, 2015 at 6:21 pm

I don’t understand why this necessarily makes a case for austerity. It presumes that “austerity” is what accounted for the change in the deficit; i.e, actual lower spending. Couldn’t the same result have occurred if there was a change in tax revenue without the government making any change to their posture regarding austerity one way or the other?

Tourism has exploded in Iceland since the crisis put it so much in the spotlight. Couldn’t a large increase in tourism dollars have swung the deficit?

28 meets June 13, 2015 at 6:59 pm

Right, austerity only matters if it fits the chosen narrative.

29 Jason Smith June 13, 2015 at 7:19 pm

Iceland never was in a liquidity trap nor at the zero bound, so the analysis seems to be tangential to the whole “austerity debate”. Plus Sadowski includes years after the finance minister of Iceland declared victory that could hardly be called austerity — vastly overstating the amount of “austerity” that happens (by a factor of almost 3).

Austerity is “we must cut back because the economy isn’t recovering and interest rates are stuck zero” not “we must cut back because the economy has recovered and interest rates are rising”.

Essentially, this is a case study in motivated reasoning …


30 meets June 13, 2015 at 7:34 pm

Then why is it being hailed as an anti-austerity success?

31 JaredN June 14, 2015 at 10:11 am

I’m not sure why it’s being hailed as any kind of success, since its annual Real GDP still hasn’t returned to its 2008 pre-crisis peak.

32 TallDave June 13, 2015 at 11:21 pm

Nonsense. Anti-austerians have repeatedly told that everyone should do what Iceland did instead of fiscal austerity. And they still are:


Well, it turns out Iceland did a whole hell of a lot of austerity.

ZLB is irrelevant. The purpose of cutting spending and raising taxes is to achieve solvency. In any case, liquidity traps are a fantasy as CBs can always inflate.

33 Cliff June 14, 2015 at 12:22 am

Okay but ECB was not at the lower bound but Krugman was still arguing against austerity- most strenuously

34 Honestly June 13, 2015 at 9:04 pm

Whenever Tyler veers into politics, he’s just hopelessly disappointing. This is a very smart man with very considerable blind spots. I enjoy the blog and find it often immensely valuable, but this kind of stuff…not so much.

35 Careless June 14, 2015 at 12:05 am

Tyler likes trolling people, and you have people like Jason Smith here willing to oblige him and make themselves look silly in response. So he’s going to keep doing it.

Although I don’t know why you’re calling this “political”

36 TallDave June 13, 2015 at 11:24 pm

The whole “austerity kills” theory is like global warming, responsible for everything yet able to predict nothing, built on bad assumptions and worse data handling, yet nonetheless a major political movement.

37 Ray Lopez June 14, 2015 at 12:32 am

Is TallDave a AGW sceptic? LOL

38 triclops41 June 14, 2015 at 11:42 am

I am not an AGW skeptic, I’d probably be closest to B Lomberg, but TD’s description of AGW is absolutely spot on.

39 TallDave June 15, 2015 at 4:45 pm

AGW is obviously happening but how well temperature and consequences can be predicted is another question — Storch’s survey found that even among climate scientists less than half believe atmospheric dynamics are sufficiently well-understood to reliably model long-term temperatures. And the record of prediction bears that out, even if you don’t go as far back as when directors at CRU and NOAA were unequivocally predicting cooling.

There’s actually a great model for these kinds of predictions, especially the dire impact studies, which is Tetlock’s work on expert predictions. He found “forecasters often only slightly more accurate than chance, and usually worse than basic extrapolation algorithms, especially on longer–range forecasts three to five years out. Forecasters with the biggest news media profiles were also especially bad.” Enough said.

And let’s not even get into whether the political prescriptions make sense.

40 T. Shaw June 14, 2015 at 11:56 am

In 2008, The New York Tass quoted a AGW cultist-with-credentials that NYC would be underwater by June 2015. I checked my cell phone to be sure. It says today is Sunday, June 14, 2015. I didn’t need a submarine to get to Manhattan.

41 Ronald Brak June 14, 2015 at 12:37 am

Iceland’s unemployment rate jumped by about 5 percentage points after the Global Financial Crisis. So obviously, whatever they did in response to it, things didn’t turn out very well. Of course, I don’t actually know that things couldn’t have turned out much worse. But Australia, which would probably be a much more relevant comparison for most developed nations than Iceland, had an increase in unemployment of about 1.5 percentage points after the GFC. So, while getting a out of a hole might be hard, if you can see a hole coming, and it looks like your reserve bank might have to drop interest rates to a dangerously low level of say under 3%, then you should have a stimulus equal to the expected size of the hole. But do one thing differently from Australia. Don’t sterilize it. Because there are people out there who say that Australia didn’t need its stimulus. If this is the case then Australia somehow managed to dump an uneeded stimulus equal to a hefty chunk of GDP into its economy without feeding inflation. So if it actually was the case that Australia didn’t need its stimulus, then if it had been unsterilized we would have somehow created wealth out of nothing. We would have given people $900 stimulus payments, had a home insulation scheme, invested in new school buildings, and so on for free. Which, I’m sure you’ll agree, would be pretty amazing.

42 meets June 14, 2015 at 1:35 am

Austerity was responsible for any problems Iceland may have had during its recovery.

43 prior_approval June 14, 2015 at 2:40 am

Man, makes one wonder what Cyprus looks like – you know, massive bank fraud, stiffing foreign depositors, etc. (A link to something of an overview – https://hbr.org/2015/03/why-greece-and-cyprus-may-be-better-off-without-the-euro – it also advocates ‘Cyprexit’.)

44 ThomasH June 14, 2015 at 7:11 am

First we have to decide what “austerity” is. “Austerity” is a political tern for mistakenly using (or claiming to use) the level of debt as an argument of the public expenditure function (with a negative sign) rather than following standard public finance criteria: making expenditures whose NPV is greater than zero when discounted by the borrowing rate. (Something similar goes on with taxes. Cutting/raising taxes allows/impedes the private sector from making expenditures with NPV greater than zero.) “Austerity” then is pretty much the polar opposite of prudent fiscal management. Since the borrowing rate probably rose after the crisis, it appears that Iceland merely exercised normal fiscal management.

45 Cliff June 14, 2015 at 12:27 pm

That’s a nice definition you invented for yourself, too bad no one else uses it

46 Careless June 14, 2015 at 6:00 pm

A post so inane, he had to make it twice.

I don’t think doubling down helped, though

47 T. Shaw June 14, 2015 at 11:49 am

Your so-called massive fiscal austerity seems to have had beneficial effects for Iceland, but not for Greece.

Iceland unemployment now is reported at 3.8% and GDP growth at 4.5% per annum.

“…By this standard Iceland has done about 30% more austerity than Ireland, over double that of the UK, roughly two and a half times as much as the US, and approximately five and a half times as much as Latvia. The only country that has done more fiscal austerity is Greece”

What other action did Iceland take that differed from the other PIIGS nations?

48 ChrisA June 15, 2015 at 1:27 am

Iceland doesn’t use the Euro. They were able to use monetary stimulus and also allow currency changes. This is not possible for Greece for obvious reasons as they don’t control their currency. The whole argument between the austerians and the anti-austerians in the US and the UK is centered on this misunderstanding. UK and US can do austerity as they have their own currencies, and so can do (and have done) monetary stimulation to offset. European countries can’t do this. But anti-austerians keep posting that the bad results of austerity in Europe is somehow a lesson for UK and US.

49 Yancey Ward June 14, 2015 at 12:36 pm

Little Ezra Klein penned an essay last week talking about how the “best informed” voters are the most easily mislead, and he literally had to be talking about Vox devotees. Well done, Matty!

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