GDP Growth and Change in Cyclically Adjusted Budget Balance

Countries that increase the structural budget balance the most have experienced the slowest growth. Here is the scatter plot for the 2008-2012 period.

Figure 1: Average growth of real GDP (in domestic currency) versus change in structural budget balance, 2008-2012. 0.10 = 10%. Sample: Advanced economies ex.-East Asia, by IMF definition. Source: IMF, WEO (April 2013) database.The slope coefficient from an OLS regression is -1.2, with a t-statistic of -3.4, using White heteroskedasticity consistent standard errors. The adjusted R2 is 0.41. Dropping Greece leaves intact a negative, statistically significant relationship.

This is an updated and expanded version of a graph presented by Paul Krugman here. So, if you were wondering, yes, contractionary fiscal policy is contractionary (as noted [1] [2] [3] [4] [5][6]).

This piece is cross-posted from Econbrowser with permission.