Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday 19 March 2014

I got to the third sentence of Osborne’s speech

The second and third sentences of the Chancellor’s budget speech today were:

            “We set out our plan. And together with the British people, we held our nerve.”
In other words, it was Plan A all the way. None of the easing of austerity that fuddy-duddy old Keynesians were asking for.
Everyone knows this is true because the Chancellor keeps telling us it is, and is rarely challenged when he does so. The only problem is that the numbers tell a different story. The best simple way of seeing how fiscal policy actions might influence the economy is to look at the cyclically adjusted primary balance: that is, spending minus taxes adjusted for the state of the economic cycle, and excluding interest payments on government debt. The first column presents the OBR estimates and forecast of that series from today’s budget. We start with the peak deficit in 2009/10, when the last government was trying to minimise the impact of the recession. We then see substantial fiscal tightening until 2012/13. Fiscal tightening essentially stopped in 2012/3 and 2013/4. (The figures exclude Royal Mail and other distortions: the headline figures that include this effect are in brackets.) 

Cyclically adjusted primary balance
Cyclically adjusted net borrowing
-0.3 (-0.1)
Above, March 2011 budget
Source: OBR March 2014 Budget Tables 4.39 and 4.43, Feb 2014 Databank, and March 2011 Budget Table 4.1.

The second row shows the same figures for the balance including debt interest payments, and the pattern is much the same. The final row shows what was planned in the March 2011 budget. That shows continuing fiscal contraction in 2012/13 and 2013/4. That was Plan A, and the table shows clearly how Plan A was abandoned as the recovery failed to come.
So the government did not ‘hold its nerve’. Thankfully it realised its mistake, and put its policy of austerity on hold. But it wants to keep that quiet, and continues to pretend it never happened. Why? The reason is that these numbers clearly indicate the original policy was damaging. Frontloading austerity was not meant to help derail the recovery. It did, so after a couple of years fiscal tightening stopped. The economy recovered. If the initial austerity was supposed to have no impact, why was it stopped in 2012/3? The Chancellor keeps telling us there is much more to do. 
So we have a blatant misrepresentation by the third sentence of the budget speech. Is this a record? I may get beyond that in later posts, but as Tim Harford writes, it really is all politics and precious little economics.


  1. And Labour are too dumb to have noticed. As the Australian economics prof. Bill Mitchell keeps pointing out, the political left worldwide is too dumb to do anything more than ape the economic illiteracy of the political right.

  2. My email from the BBC 21 July 2012:

    "Underlying your point about the liquidity trap is a presumption that the BBC necessarily adopts a given economic theory to underpin its rapportage [sic] of economic events. Yet it is not our job in news coverage to endorse one theoretical framework or another, or to put a theoretical interpretation on the financial crisis and subsequent recession. Our aim is rather to give viewers and listeners what they need to draw their own conclusions on the nature of the crisis."

    (Make up your own jokes about 'rapportage' and its meaning).

    My email from the BBC 02 May 2012"

    "The job of our economics team is to make sense of hugely complicated areas such as these for general audiences, and for that reason they would often choose not to deploy such difficult jargonistic terms as liquidity trap – especially in a short bulletins piece - if they felt such a term would not add to audience understanding. That in no way is intended to reduce the depth and the context they seek to bring to such issues and I would want to reassure you that they go to great pains to ensure their analysis is as detailed and accessible as it can be."

    (Surprisingly, 'jargonistic' is in the dictionary).

  3. How about a chart of unnecessary unemployment, deaths and illnesses due to cuts, the costs of imposing austerity and testing recipients of benefits and a list of beneficiaries of austerity? Don't those count as economic data?

  4. I agree austerity was eased off, but I thought the plan was to cut the deficit through the minimal 15pc tax rises relatively early on in this administration, whilst the spending cuts were always scheduled for later in Parliament. Austerity will still come this year as the final tranche of spending cuts are made. Ifs have suggested more than half the cuts are to come. To be honest, whilst I oppose what the coalition are doing, it is has the hallmarks of a brilliant political strategy because most people will see growth, falling unemployment and a slight rise on earnings by the time of the election. Ignoring failure on debt and the deficit.


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