The notion of a reverse Ricardian-equivalence is in play again today following news that U.K.’s economy grew at a 0.8 percent pace in the third quarter, double the consensus forecast (a Ricardian-equivalence occurs when households and businesses alter their behavior in the present expecting that national indebtedness will in the future result in future confiscation of their income).
A similar concept can be applied to Germany and other nations within Europe that have posted better-than-expected economic results.
Growth in the U.K. in the third quarter was fairly broad, with gains appearing in many sectors of the economy. Construction spending, which increased at a 16 percent pace, led the charge. Government spending, which will become a drag on growth next year, increased at a 2.4% pace.
While there is no doubting the direct negative effects of austerity on nations, in a era where indebtedness is seen as a sign of bad health, efforts to clean up balance sheets have their rewards, from investors, who are more willing to invest in nations charting a more healthy course, and from citizens, who in the face of fiscal consolidation worry less about future confiscation of their income.
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