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Simple and Predictable Story of Fiscal Bankruptcy in Cyprus

The Mediterranean island nation is a good case study illustrating the economic dangers of big government and the budget data shows that Cyprus is in trouble because of excessive spending. Interestingly, if Cypriot politicians had engaged in a very modest amount of spending restraint and limited annual budgetary increases to 3 percent, there would be a giant budget surplus today and the burden of government spending would be down to 21.4 percent of GDP, very close to the levels in the hyper-prosperous jurisdictions of Hong Kong and Singapore.

Actually, a simple way to look at this data is that Cyprus used to have a Swiss-sized government and now it has a Greek-sized government.

What’s the moral of the story? Simply stated, the fiscal policy variable that matters most is the growth of government. Cyprus got in trouble because the burden of government grew faster than the productive sector of the economy.

Cyprus Gov't SpendingThat’s the disease, and deficits and debt are the symptoms of that underlying problem. Europe’s political elite doubtlessly will push for higher taxes, but that approach – at best – simply masks the symptoms in the short run and usually exacerbates the disease in the long run.

The Simple and Predictable Story of Fiscal Bankruptcy in Cyprus | Cato @ Liberty The Simple and Predictable Story of Fiscal Bankruptcy in Cyprus Posted by Daniel J. Mitchell.

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This entry was posted on July 7, 2012 by in Direction and tagged , .

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