Little evidence fiscal austerity triggers growth

Economics writer Paul Mason has pointed to a powerful implied critique of the Spending Review in an IMF document published this month. Speaking as guest lecturer at a seminar for the New Political Economy Network on Monday night, Mason called for a “forensic” analysis of what he described as “the large theoretical variability” of the outcome of George Osborne’s fiscal tightening proposals.

This guest post is jointly written by Daisy Blacklock and Jim Milnes of the Dress to the Left blog

Economics writer Paul Mason has pointed to a powerful implied critique of the Spending Review in an IMF document published this month. Speaking as guest lecturer at a seminar for the New Political Economy Network on Monday night, Mason called for a “forensic” analysis of what he described as “the large theoretical variability” of the outcome of George Osborne’s fiscal tightening proposals.

Drawing on projections approved by the Office for Budget Responsibility in June’s Emergency Budget, Mason, author of Meltdown: the End of the Age of Greed, led talks with his deconstruction of the government’s economic forecast.

The coalition’s Spending Review is built on the theory of “expansionary fiscal austerity” which gained favour after the experience of Canada and Sweden in the early 1990s. This assumes that, while a medium sized deficit/fiscal stimulus can boost growth, where it becomes too large it becomes a drag on growth, and cutting it will stimulate growth.

Mason pointed to the IMF’s conclusion:

“The idea that fiscal austerity triggers faster growth short term finds little support in the data.”

According to the OBR, by 2014 – when by Osborne’s timetable the rebalancing process will be complete – government spending as a proportion of GDP will have disappeared altogether, to be replaced by exports. Consumer spending as a proportion of GDP will have fallen by a third.

Mason added:

“Leaving aside all political rhetoric and getting to the undisputed economic conundrums, the question is, what are you going to have to do to make this work? Because it’s going to happen. This is pure macroeconomics.”

While Mason acknowledged that the coalition’s preferred model, provided by Policy Exchange, draws on a survey of history as thorough as the IMF’s, he said Policy Exchange lacks the most developed computer model of the world economy in existence, the GIMF, which allows the IMF a wider picture, if not a clear forecast.

He pointed to the fact that the IMF’s model of the long and short term impact of fiscal tightening considers the global context, with the downward pressure on growth reduced if you can devalue your currency, boost exports and cut interest rates to gain competitive advantage.

He explained:

“These are the variables: is the interest rate 0%? Well, it nearly is. So you can’t cut the interest rate. Does everybody else cut? Well they are, above all in Europe. Not in America, not in China, but in Europe there is fiscal austerity.

“Does the currency depreciate? Well, it is. It’s already depreciated by 18%, and probably will continue to do so. The other problem is, does everybody else attempt depreciation? Yes, they are.”

Where the IMF and Policy Exchange models agree is in the long-term need to reduce the deficit as a proportion of UK GDP. The question is – which is the best model?

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7 Responses to “Little evidence fiscal austerity triggers growth”

  1. Stuart King

    RT @leftfootfwd: Little evidence fiscal austerity triggers growth: http://bit.ly/cnlNSH

  2. Lee Dunn

    RT @leftfootfwd: Little evidence fiscal austerity triggers growth: http://bit.ly/cnlNSH

  3. Martin Johnston

    surprise surprise RT @leftfootfwd: Little evidence fiscal austerity triggers growth: http://bit.ly/cnlNSH

  4. BertromavichEdenburg

    Little evidence fiscal austerity triggers growth | Left Foot Forward: This is pure macroeconomics.” While Mason ac… http://bit.ly/9v0sX5

  5. Mr. Sensible

    I think we only need look at places like Ireland to see what happens following austerity…

  6. LITTLE EVIDENCE FISCAL AUSTERITY TRIGGERS GROWTH « dresstotheleft

    […] article was published on Left Foot Forward – the no. 1 left-wing blog for progressives – on 29 […]

  7. Austerity Bill

    Austerity is happening, but in an era of so many austerity issues, we are yet to know what the correct measures are.

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