As Veronique explained below, there’s evidence to suggest that public-sector austerity hasn’t been the disaster some have called it, with notable success in the Baltic states. Australia has undergone a fairly vigorous campaign of austerity, with a 2012 budget that cuts spending by 4.3 percent.
And what’s the news today? Australia’s economy grew at a 4.3 percent annualized rate in the first quarter, an uptick double what economists had expected. Of course, Australia’s economic success is largely due to the country’s commodity boom (which has had some Dutch Disease downsides already), but it seems to suggest that real cuts in government spending need not be a mortal blow for an economy. It remains to be seen how long strong growth will last — Prime Minister Julia Gillard’s Labor government is planning to introduce a carbon tax of AU$23 per metric ton, hampering the economy to some degree.