Heritage Foundation, Economic Freedom, and Greece

What country cut government spending the most in 2011?

Most people would generally agree that the answer is Greece. Smack in the middle of a debt crisis, Greece’s government has been forced to take an axe to government spending. Month after month has been marked by budget cut after budget cut.

The Heritage Foundation is a conservative think tank which publishes a ranking of economic freedom according to each country. These rankings are based on conservative economic values, such as low government spending. According to the Heritage Foundation, the less your government spends, the more economically free your country is.

So, after three years of cutting government spending to the bone, how’s Greece doing on the Heritage Foundation’s ranking of economic freedom?

Pretty poorly:

In fact, the Heritage Foundation states that Greece has recorded the “largest score decline in the 2012 Index.” Why is this? Well:

Greece’s economic freedom score is 55.4, making its economy the 119th freest in the 2012 Index. Its score is 4.9 points lower than last year, reflecting declines in six of the 10 economic freedoms with particularly acute problems in labor freedom, monetary freedom, and the control of government spending.

This pattern is not only limited to Greece. The four other Eurozone countries in trouble (Ireland, Italy, Portugal, and Spain) have all been slashing their budgets to the bone. Austerity and cuts in government spending have been the main preoccupation of their governments and will continue to be for probably all of next year.

Unfortunately, all of these countries have also suffered corresponding declines in the Heritage Foundation’s rank of economic freedom. Here is Ireland:



And Spain:

Why has this happened?

Well, the answer is kind of ironic. Here’s what the Heritage Foundation says:

Ireland’s economic freedom score is 76.9, making its economy the 9th freest in the 2012 Index. Its score has decreased by 1.8 points from last year, reflecting poorer management of government spending and reduced monetary freedom.

Italy’s economic freedom score is 58.8, making its economy the 92nd freest in the 2012 Index. Its overall score is 1.5 points lower than last year, with significant declines in freedom from corruption and the control of government spending.

Portugal’s economic freedom score is 63.0, making its economy the 68th freest in the 2012 Index. Its score is 1.0 point worse than last year, mainly due to deterioration in the management of government spending, labor freedom, and fiscal freedom.

Spain’s economic freedom score is 69.1, making its economy the 36th freest in the 2012 Index. Its score is 1.1 points lower than last year, with a significant deterioration in the management of government spending overwhelming a modest gain in business freedom.

After cutting government spending by enormous amounts, the scores of these five European countries have gotten worse…because they can’t control government spending.

Indeed, the vast majority of the decline in economic freedom of Italy, Ireland, Portugal, and Spain occurs due to lower scores on government spending. Here’s a table that specifically shows how much worse their scores on government spending have gotten since 2011:

Score Changes Since 2011
Country Government Spending
Greece -18.1
Ireland -16.7
Italy -9.2
Portugal -10.7
Spain -12.2

It’s pretty undeniable that these countries have been cutting government spending. And yet their scores on the control of government spending keep on getting worse. What gives?

Well, it has to do with the way that Heritage Foundation measures government spending. Specifically it uses government spending as a percentage of GDP; as a government spends more relative to GDP, its score gets exponentially worse.

What’s happening with these five European countries is that while they have indeed cut government spending, their economies have fallen into recession (coincidence?). So government spending, while numerically less, ends up composing a larger percentage of their GDP (which is declining even faster than spending).

Poor Greece. It cuts government spending to the bone for three years, falls into a depression that will be remembered for one hundred years, only to default on its debt anyways. And worst of all, its score on the conservative Heritage Foundation’s economic freedom ranking falls more than any other country because – wait for it – Greece has failed to control government spending adequately.

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