The Cowen experiment
Not every country is opting for fiscal stimulus:
public-spending cuts on Tuesday, saying the country desperately needs
to shore up its battered public finances. Also Tuesday, the Polish
government approved a contingency plan to trim public spending by 19.7
billion zlotys ($5.65 billion). The budget cuts come even as other
countries are boosting spending to juice their economies.
Speaking to the Irish parliament, Prime Minister Brian Cowen said
the bulk of this year's cuts — some €1.4 billion — would come in the
form of increased pension levies on public-sector employees. That is
effectively a pay cut for those workers. Mr. Cowen also pressed forward
with tax increases for higher-income workers and second-home owners.
I'll let you know how it goes. A few things are worth noting. First, a small open economy has a harder time making fiscal stimulus work. Second, a small open economy often has to worry more about its credit rating. Third, a small open economy offers a tougher testing ground for macroeconomic "field experiments" because there are more confounding external factors.