Three months ago, when I was complaining
about the economic illiteracy shown in the Financial Times leader
entitled “Osborne wins the battle on austerity”, I focused
on the general point that austerity meant delaying the recovery, not preventing
it ever happening. However there was another sense in which that leader, and
all the similar comments made by many others, was wrong. Numbers from the latest
OBR forecast allow me to give more detail on how Plan A was in fact put on hold,
and the recovery we have had has followed a suspension of austerity. (Another
reason for doing this is that some of the headline numbers are distorted by
special factors, which the OBR corrects for now, but which may get lost later.)
To quote from that FT leader: “Since
the austerity policy was still under way, claims that a “Plan B” was
necessary to trigger a recovery had been proved wrong, [Osborne] argued. Mr
Osborne has won the political argument.” From which you would gather that we
are still following Plan A, which involved steadily reducing borrowing by,
among other things, reducing the share of government spending in GDP.
So here are the numbers.
Osborne's Plan B
|
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
Deficit/GDP
|
11.0
|
9.3
|
7.9
|
7.8
|
7.5
|
6.5
|
5.5
|
3.7
|
2.3
|
|
Cyclically Adj
|
8.7
|
7.1
|
6.0
|
5.9
|
5.1
|
4.0
|
3.2
|
1.7
|
0.7
|
|
G Con growth
|
0.7
|
0.5
|
-0.1
|
2.6
|
0.4
|
-0.7
|
-0.4
|
-1.0
|
-1.8
|
|
G Con/GDP
|
23.2
|
22.7
|
22.0
|
21.8
|
21.0
|
20.5
|
19.7
|
18.8
|
17.7
|
Notes. First
two rows are for financial years, second two calendar years. Row 1: Deficit/GDP
is PSNB/GDP as a %, adjusted for Royal Mail and APF. Row 2 is the same,
cyclically adjusted. Sources for both are OBR
December Autumn Statement Forecast Table 4.34 and their historical database. Row 3,
percentage growth of real government consumption, source OBR Table 1.1 and ONS.
Row 4, source OBR
Chart 3.29.
We start with the deficit as a percentage of GDP. This was
very high in 2009, partly because of the recession, but also to stimulate the economy. Austerity began in 2010, and continued in
2011, with sharp falls in the deficit. But in 2012 the deficit was much the
same as it was in 2011. There is then a (forecast) modest fall in 2013,
followed by a projected return to austerity from 2014 onwards. We get a similar
pattern if we cyclically adjust these numbers (using OBR estimates of the
output gap).
An alternative summary statistic to judge the fiscal stance
is to look at government consumption of real goods and services. Although this
tells only half the fiscal story, because it ignores taxes and transfers, many
people will be able to smooth the income effects of tax changes through saving.
Government consumption, however, feeds straight through into demand. Real
Government Consumption showed little growth in 2010, fell slightly in 2011, but
increased by over 2.5% in 2012. These numbers depend on the government
consumption deflator, which may not be very well measured, so the final row
shows the share of government consumption in GDP. The pattern is similar.
So there you have it. Plan A was temporarily abandoned.
Austerity stalled. Was that important in boosting the recovery that
followed in 2013? We cannot know for sure, but that is not the key issue here.
The important point was that Plan A was clearly put on hold. Claims that the
government stuck to Plan A are false. The reason Plan A was abandoned, of
course, was that it was delaying the recovery, and the government needed a
recovery before the next election.
Nothing I have said here is particularly new – Jonathan Portes
made the same point
in September, for example. Of course the right wing media (which the FT shows
signs of wanting to join) ignore these facts. The interesting question is
whether others in the media will follow their lead. They did so with the myth
of Labour profligacy – but that was based on a half-truth. They continue to
treat the economic impact of austerity as controversial (despite the OBR and
European Commission numbers discussed here
and here),
but there will always be some economists who make it appear so. But in this
case the numbers are actual data, and their implication is absolutely clear. So
we will see if the myth that Osborne stuck to Plan A survives, and we really do
have to live
with a post-truth media.
I completely agree with the thrust of this piece (and indeed with the New Statesman piece by Portes making the same point). However four points then follow that should cause this author and Portes to look at themselves.
ReplyDelete(i) Osborne abandoned further fiscal consolidation over 18 months ago, and yet this blog, and the NIESR, carried on telling us that we were living under the brutal heel of austerity. Were you deceived by the rhetoric so as not to look at the numbers?
(ii) The above is rather a different explanation for why UK 'austerity' had less impact on GDP than for other countries than you posit here
http://mainlymacro.blogspot.co.uk/2013/10/the-official-cost-of-austerity.html
Which is that comparatively we did not really have much austerity after the first 18 months of this government,
(iii) This post (and Portes') look a bit ex post. None of the reputable economists I follow (including this one and Portes) predicted this year's upturn in the UK. There was no shock or change (eg a Lehman Bros, ERM exit) to explain away the failure to spot the inflection point that was coming.
It would have been, to say the least, better to have drawn our attention to Osborne's change of course at the time, rather than now.
(iv) There is inevitably a gap between reality and the rhetoric of politicians. They are constrained in a way that academic bloggers are not.
Instead of (as here) portraying Osborne as a disingenuous charlatan, quite a good case can be made for his having done,within the political constraints applicable to him, what Portes and Wren-Lewis were urging him to do 18 months ago.
Which is something deserving of praise i would have thought? Even if through gritted teeth.
So lets see what you are suggesting here. A Chancellor comes in to office, and announces a much sharper fiscal contraction than his predecessor, despite the fact that the economy has only just begun to recover from the worst recession since the 1930s, and interest rates are still stuck at their lower bound. He denies that this contraction will hurt the recovery. These policies are enacted, and partly for this reason, the recovery stops.
DeleteRealising his mistake, and fearful that the recovery may be too close to the next election, he puts a temporary hold on fiscal tightening. But the rhetoric is unchanged, such that when the recovery comes, he claims this proves his austerity policies have worked. He continues to plan future austerity, even though the recovery has only just begun (again).
In these circumstances you are suggesting I should praise his actions! If this truly describes what is going on, it seems to me the right thing for him to do is admit his mistake and resign. Many politicians have resigned for much less harmful mistakes.
You say "within the political constraints applicable to him". I think this is code for not admitting your mistakes, and then attempting to repeat them having realised the mistake. Call me old fashioned, but I do not want politicians who apply these constraints to themselves running the economy.
"In these circumstances you are suggesting I should praise his actions!"
DeleteYes, I am
First because, as you know, your potted history omits a number of facts, most importantly the sharp rise in commodity prices and the eurozone crisis. These meant that Osborne's fiscal consolidation had a worse impact than was foreseen. He reversed himself. Good.
Second the standard you think should apply to Osborne is frankly ridiculous: and you know it. If he resigned, saying that the initial fiscal contraction was, we now know, too quick, that would destroy the Conservative party. Just as, say, Brown's resigning on the basis that fiscal policy was far too loose at the height of the boom leaving the UK peculiarly vulnerable when the crash occurred would have destroyed the Labour party.
He is not engaged in writing an academic paper where fessing up to a mistake is the proper course of action. What he should do, as any politician of any hue would do, is exercise his best judgment as to what to do and then put the best spin on the results he can. That is politics.
In the end what he did was only fractionally different from the Darling plan. The noise of politics seems to blind even academic economists to the numbers.
Macroeconomists have a hard time admitting that they hopelessly mispredicted the UK's economic performance in 2013. Expecting Osborne to meet a higher standard is naive in the extreme.
Now we know why you call yourself "Spinning" Hugo.
Delete1) Interest rates were at their lower bound when Osborne became Chancellor. As I have explained before, in that situation anyone who embarks on austerity by choice is taking a huge risk with the economy, because if other things go wrong they have no defense. He gambled that nothing would go wrong and lost. He backtracks to win an election, but plans to make the same mistake again. Praiseworthy?
Delete2) Fiscal policy was not 'far too loose at the height of the boom leaving the UK peculiarly vulnerable when the crash occurred', as I have explained many times. The danger with spin is that you begin to believe it.
3) Osborne did have a political way out. He could have said 'austerity was necessary in 2010/11 because there was a real threat of a market panic over UK government debt. That threat is over, so we can ease up on austerity'. He didn't say that, because he wants to use debt as a pretext for reducing the size of the state. Is that spin, or deception?
4) I never mispredicted the UK's performance in 2013, because I do not do that kind of forecasting. Most forecasters underpredict turning points - so what? I did predict (nearly two years ago) that when the recovery came, Osborne would say it was all down to austerity and so we need more. I could make that prediction because I thought his main objective was to shrink the state and win elections, and the immediate health of the economy was a secondary concern. And yes, I do expect Chancellors to be better than that, and in the past they have been.
" I have argued .. that UK fiscal policy was not tight enough in the years 2003-7, certainly in hindsight, but even given what we knew at the time."
Delete- S Wren-Lewis
Well, that I agree with.
And here is S Wren-Lewis not making predictions on UK growth in February 2013
Deletehttp://mainlymacro.blogspot.co.uk/2013/02/the-final-verdict-on-george-osborne-as_23.html
And if you read the whole post from which your quote was taken (http://mainlymacro.blogspot.co.uk/2013/06/fiscal-legacies-and-competence.html) you will see that it is completely consistent with fiscal policy NOT being 'far too loose at the height of the boom leaving the UK peculiarly vulnerable when the crash occurred'. The idea that Brown making small and easily corrected mistakes on the deficit which did the economy very little harm can be compared to austerity which lost us percentages of GDP is laughable. And as you found out, I did NOT 'hopelessly mispredicted the UK's economic performance in 2013'. Actually I think that was a rather good post given what has happened.
DeleteThe point is not whether your (many if sometimes implicit) predictions are right or wrong, but rather whether you are correct to (now) claim that you are not making any.
DeleteEconomists cannot help it. That is their job, despite the protestations of some to the contrary (so as not to be open to being proven wrong).
A neutral reader who goes back through your posts that concern UK conditions late 2011 until early 2013 would not conclude that you thought we would be where we are now.
It would, of course, have been nice to have been told in advance that 'austerity' could not prevent the recovery happening anyway, or that Osborne had adopted a plan B before the change for the better occurred, but there we are.
My view, for what it is worth, is that Osborne deserves little credit, and little blame, Brown, by sharp contrast, deserves little blame but little credit.
Well, I am a neutral reader, and I went back through the posts and more or less support Simon Wren-Lewis. His predictions were sensible, neutral and informed.
Delete"SpinningHugo", on the other hand, should be familiar to anyone who has read the comments at the bottom of Guardian articles - where he is regularly to be found doing his best to defend Tory policies and to come up with "gotcha" questions of little substance to attack the left. He is a well known troll and timewaster, clearly intellectually dishonest - but it is nice to see him put in his place by someone who actually knows a thing or two.
I am a neutral reader,
DeleteHe is a well known troll and timewaster.
Thanks for the neutral adjudication.
Agree with both 'Anonymous' contributors above.
DeleteIt is astonishing how the attacks and criticisms by some are reserved almost solely for economists who try to analyse and explain things (whether they make predictions or not, and whether they turn out correctly, or not), rather than those actually in charge of the levers (such as George Osborne) ie. those who have cost the economy countless billions in lost output,many, many jobs and the long term negative effects to be felt for years to come, thanks to 2-3 years of pursuing incorrect policies.
Even if S W-L was completely incorrect before, now and going forward, people's ire should be firmly focussed on those actually creating the economic and social misery, not on those economists who are simply commentating on it. (Unless of course the economist is directly advising government who follows their advice!).
Keep up the outstanding work SWL, your insights are much needed in what is mostly an evidence free UK media when it comes to the economy.
Simon, (above), well said and fully subscribe to your view.
DeleteIn Sunday, 15 December 2013 column 'Inequality and the Left' you gave a very your generation response to the 1970's trade unionism.
ReplyDeleteFor me and my generation, at school under John Major, trade union power and Taff Vale privileges look a long way away.
Now it is the media that is losing jobs, putting their journalists under pressure, and standards of probity have fallen.
Let us watch the BBC, Sky, and the press to see what happens.
George Osborne has got Ganesh in the FT, Danny Finkelestein in the Times (sorry Lord Fink now, for his services to the cause) and Bennedict Brogan writing love letters in the Telegraph.
DeleteYou can't go far wrong if your friends are writing the news.
Whatever happened to that idea that the press should treat politicians like a dog treats a lamppost?
In May 2010 the Sun's circulation was 2.9m, in November 2013 it was 2.1m. The Mail has fallen from 2.1m to 1.8m, The Telegraph has fallen from 700k to 540k. The Guardian is down from 300k to 200k.
ReplyDeleteIn general, they are not thriving on the internet. According to Alexa the Daily Mail has the 100th most popular website, the Guardian is 155th and the Telegraph is 228th. Whereas Blogspot is 13th, and Wordpress is 19th, even the Huffington Post is 64th.
The traditional newspapers are no longer credible sources of information. The Mail, Telegraph and Times appear content to merely rewrite Tory press releases. Consequently their readers are abandoning them in their millions. Their position is untenable, and on current rates of decline most physical newspapers will cease to exist within a decade.
The FT is little better. If I were Brad DeLong I might ask, "why oh why do they persist in shredding their reputation by publishing Janan Ganesh's puff pieces for Osborne?"
To put things into perspective, the real problems were caused during and by the last government, not this one. One I suspect, Jonathan Portes had a big role or influence in the policies taken (fast and deep liberalisation of capital and labour flows, easy credit and poor regulation of the financial sector). Voters will compare the performance of the two governments and decide they do not want to risk a return to those kind of policies.
ReplyDeleteI just did and I am voting Labour. Thanks !
DeleteWhat Labour says in opposition and what it does in government are two different things. Even if you don't like austerity, at least the Tories did what they said they would do.
DeleteYou sir, (tory supporter) have absolutely no clue what you are talking about. Back to the Daily Mail ,quick,quick
DeletePerhaps you would prefer the Murdoch Press which New Labour also likes?
DeleteNothing is going to change in this country until the deep rooted problems related to long term structural unemployment (particularly youth unemployment and related inequality are solved). New Labour, reflecting a particularly strong orthodoxy during the Great Moderation, said it could be solved with education, light touch financial regulation and very liberal international labour inflows. Well, it did not work. Economists would have been surprised, historians less so. Austerity or no austerity these labour market problems have to be directly tackled, expansionary macro-economic policy could actually make these distortions worse.
DeleteThe Right will become more and more rabid in the future. The reason for this is simple. Younger generations, who are well educated (thanks to left policy), do not buy into the vicious Tory propaganda. Their electorate is shrinking and they know it. Their lies will become bigger and demagogy will be taken to the next level in order to induce the working class to vote for them (against their economic interest).I am sure they will make a pact with despicable UKIP in 2015 .
ReplyDeleteDuring this, the quality of political and economic debate will be lowered to levels unseen yet in the UK. People like SpinningHugo will be employed to comment on blogs and articles. They will make everything sound like a Ferrari show. Sad.
I'd certainly hope Hugo is earning a few pounds for his efforts.
DeleteI mean imagine going to all that trouble to write nonsense on multiple websites in your own free time...
So why did uk have a sharp bounce back in growth in 2013 despite the austerity being almost as bad as in 2011, judging by your numbers? Just out of curiosity. I know it's really "irrelevant".
ReplyDeleteStay tuned (for just a few days I hope)
DeleteWhat is your response to this, Simon? As measured by change in cyclically adjusted borrowing or change in G consumption as a % of GDP, we returned to 2011 levels of austerity this year. Just as the recovery has taken off. How does this fit with your analysis?
DeleteI covered this here: http://mainlymacro.blogspot.co.uk/2013/12/some-notes-on-uk-recovery.html
Delete