Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday, 19 June 2017

Austerity will only end when our leaders start being honest

Austerity was the underlying motivation for starting this blog. Sometimes I think everything that I, Paul Krugman and many others have written over the last six or more years has fallen on deaf ears. Take two recent pieces of evidence: this FT article by Nicholas Macpherson, ex permanent secretary at the Treasury, and this interview of the Chancellor by Andrew Marr.

In talking about Osborne’s fiscal consolidation that began in 2010, Macpherson says: “With hindsight, there was a case for going further faster.” His rationale is that the public like a dose of austerity, but tire after a time. At no point does he mention the economy (a recovery that stalled from 2010 to 2013, and then only started growing at trend thereafter), or monetary policy (interest rates were stuck at their lower bound). His desire for a shorter, sharper fiscal shock would have almost certainly produced a second recession.

I calculated that the fiscal consolidation that did take place cost the average household at least £4,000 in lost resources. This is based on OBR numbers, and assumes (as the OBR does) that the economy recovers quickly from any fiscal consolidation. This latter assumption looks very shaky indeed. Once you stop making it, the costs of austerity become horribly large. Not a word about this from Macpherson, which allows him to make the ridiculous argument that we should have had a shorter sharper consolidation.

One of the other ridiculous things Macpherson says is that, from 2010 to 2016, the UK did not even experience austerity. He justifies this because the debt to GDP ratio over this period rose. I’ve heard similar things in comments on my blog, presumably because of what Conservative politicians or their apologists say in the press. The statement confuses levels with rates of change, whether you are talking about the impact on the economy or on individuals. This is first year undergraduate stuff.

Philip Hammond said in his interview that a deficit of 2.5% is not sustainable. The normal definition of sustainability is a deficit that keeps the debt to GDP ratio constant. The current debt to GDP ratio is 86.5%. To work out roughly what the sustainable deficit is, divide the debt level by 100 and multiply that by the expected growth rate of nominal GDP. That means that today a deficit of 2.5% of GDP would be sustainable as long as nominal GDP grew at about 3%. So his statement that a deficit of 2.5% is not sustainable simply looks wrong.

You could rationalise this by saying that he believes our current debt to GDP level is not sustainable, and that therefore he wants to reduce it, but if that is what he means he should say so. Instead it seems that he wants to pretend that the government is like a household, and so therefore there is some reason why a deficit of zero is desirable. Of course Hammond does not mention interest rates either. And he knows that, in an interview like this, he can get away with anything involving economics or numbers.

Austerity has been supposedly dying since after the Brexit vote, but that just reflects misleading or dishonest reporting. As Torsten Bell says, for most people austerity means cuts to public spending, and for public sector workers and those on low incomes there is more austerity to come. Hammond also said Labour’s proposed fiscal policy would be “catastrophic for the country”. I suspect this kind of nonsense hyperbole, frequently invoked by the right wing press, has now become counter-productive. In reality at the heart of Labour’s fiscal policy is a fiscal rule which takes the government’s role in the economy seriously, rather than reduce it to the budget of a Swabian housewife. I cannot wait for the day that becomes the UK government’s fiscal rule, and we can move discussion of UK fiscal policy away from numbers 'not adding up' and back into the 21st century.

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