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.
