The New Yorker - U.K. Lesson: Austerity Leads to More Debt(7 Posts)
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Yesterday, I argued that U.S. fiscal policy is heading in the wrong direction, toward the economics of austerity. If you want to know where this path can lead, look across the Atlantic to poor old Blighty. For almost three years now, since the election of a Conservative-Liberal coalition, the British government has been slashing government programs and raising taxes, supposedly to reduce a big budget deficit. As Ive written previously, the results have been pretty disastrousboth for ordinary Britons and for the public finances.
Just how disastrous was made clear yesterday by a new report from the Institute of Fiscal Studies, a London-based think tank that is widely regarded as independent and nonpartisan. In the Green Budget, its lengthy and detailed annual review of the U.K.s finances, the I.F.S. pointed out that the budget deficit, far from being eliminated, was still so large that next year the Chancellor, George Osborne, will have to borrow about sixty-five billion pounds more than he had anticipated. (Thats about four per cent of the U.K.s G.D.P.) Indeed, the hole in the public finances is so big, the I.F.S. said, that the government might well be forced to introduce a series of tax hikes following the next general election, which is expected to take place in 2015.
Even some commentators who have supported the austerity program appear dejected. This is a truly desperate state of affairs that demands swift and decisive action, the Daily Telegraphs Jeremy Warner wrote in his column following the release of the report. And he went on: We seem to have the worst of all possible worlds, with nil growth, some very obvious cuts in the quantity and quality of public services, but pretty much zero progress in getting on top of the countrys debts.
Thats a pretty accurate synopsis. When Osborne and his boss, David Cameron, took over in May, 2010, and committed to an unprecedented program of austerity measures, the economy was slowly recovering from the Great Recession. By the final quarter of 2011, it had fallen back into a recession, from which it has yet to emerge. In the third quarter of last year, the London Olympics gave the economy a temporary boost, but in the fourth quarter G.D.P. fell again, at an annualized rate of more than one per cent. Whether this should be categorized as a double dip or a triple dip is a matter for debate, but the fact remains that Osborne promised growth and instead delivered a lengthy slump.
In one thing, the Chancellor has succeeded: he has delivered cuts to programs. By the fiscal year 2014, he will have slashed more than ten per cent from overall spending by U.K. government departments, according to the I.F.S. While some departmentsincluding the National Health Service, overseas aid, and part of the education budgetare protected from the economic measure, others have seen savage budget reductions. But this hasnt led to the improvement in the government finances that Osborne and his supporters predicted. As a result of the renewed slump, tax revenues are lower than expected and spending on benefits for the unemployed has risen. Overall government spending has continued to rise; the budget deficit has remained stubbornly high. And thats why Osborne still will need to borrow so much money.
In short, the U.K. experience shows how austerity policies, when applied without regard to the state of the economy, often lead to more government borrowing and debt creation, not less. In the past few years, weve seen pretty much the same thing happen in other European countries: Greece, Ireland, Portugal, and now Italy and Spain. Still, though, many proponents of austerity refuse to acknowledge their errors.
Osborne is one of them, which is only to be expected: hes an unpopular politician, with his career on the line. It might be hoped that international organizations tasked with purveying economic wisdom, such as the International Monetary Fund and the Organization for Economic Coöperation and Development, would be more open to reappraising their views. Not so, apparently. The I.M.F. remains staunchly behind Osbornes policies, and, in a statement released yesterday, the O.E.C.D. said the U.K.s fiscal stance remains appropriate.
However, there are some signs of glasnostor weaselling, anywayon the part of the austerity hawks. If growth significantly underperforms expectations over the coming months, the statement from the O.E.C.D. continued, the flexibility of the fiscal framework should be utilised. That appears to be code for refraining from further cuts in spending (especially on unemployment benefits and other so-called automatic stabilizers), borrowing more money in the bond market, and allowing the deficit to balloon further. A shorter way to put it: when you are in a hole, stop digging.
We all know your position on austerity and that we should be spending more rather than less in the UK.
I'd be interested to hear what you think of the EU talks though? Do you think we should be making cuts then? Or should the EU be actually spending our way out of recession too?
> We all know your position on austerity
It's not just my position, but it's currently the position of the IMF, the head of Goldman Sachs, US President Obama, the PCS and Unite unions, and pretty much every self-respecting economist since Keynes.
> and that we should be spending more rather than less in the UK.
No, it's not about 'spending more'. When or if the economy ever recovers, then we can talk about reducing the deficit and debt. Austerity measuring during a recession/depression have never worked, and usually succeed in making things worse - which is precisely what is happening now.
> I'd be interested to hear what you think of the EU talks though? Do you think we should be making cuts then? Or should the EU be actually spending our way out of recession too?
Who is the 'we', here, and cuts to whom and where?
It was a simple enough question really.
Do you believe the EU should have their budget cut (as is in the news)?
The truth is I don't know, but probably. I haven't looked at what the EU budget is, and how much the UK, and each other country in the EU contributes to the budget.
I do think that EU bureaucrats are paid quite a lot of money and, like MPs, should take a pay cut. Like minx(?) I think mentioned on another thread, it's unacceptable that EU bureaucrats call for the EU-wide austerity measures while they continue to be paid over £70K for their salaries, plus a multitude of other benefits.
Paul Krugman: Global Austerity 'An Unethical Experimentation On Human Beings'
Thanks Ttosca, I am liking Krugman more with each passing day he like Stiglitz is moving further to the left.
But there are still huge flaws with their thinking and I seriously wonder where their real allegiance lay. Krugman is using Keynes language and calling on the government to borrow and spend because he quite rightly has located part of the problem within the private sectors lack of confidence.....they won't borrow to invest. Part of me suspects that Krugman et al want government spending to stimulate demand in the private sector, whilst this might create jobs and work in the short term, it kind of mimics what is happening in terms of privatisation anyway. Governments are taking on the debts and the risks and passing this to tax payers whilst any profit/recovery is on the books of private business. As things stand the situation is very different to the 1930s, not the cause but our privately sponsored politicians (puppets) are not going to be looking at how to get the private sector to pay more in tax or even demand that they invest. In the 30's the political class wasn't the corporate class now the two, are one and the same. Which is possibly the reason we have absolute stalemate.