Keynes’s ghost continues to haunt George Osborne

That George Osborne should hail the loss of the UK’s AAA credit rating as evidence that yet more of the same cuts and austerity are needed is an alarming example of Orwellian “doublethink.” What is needed is Keynesian government pump priming, to fill the potholes, build houses, improve local rail networks (not HS2), invest in renewable energy sources etc, and so create employment, restore growth, increase tax revenues, eliminate the current deficit and bequeath to future generations a spanking economic infrastructure and a healthy society.

Peter Wrigley blogs at Keynesianliberal

That George Osborne should hail the loss of the UK’s AAA credit rating as evidence that yet more of the same cuts and austerity are needed is an alarming example of Orwellian “doublethink.”

We learned our lessons on how to deal with depressions in the 1930s. Here’s a simple explanation. Because national income fell government revenues fell.

Economic orthodoxy at the time (before Keynes’s “General Theory” became accepted doctrine) was that the prudent chancellor should balance the budget.  So when revenues fell, government expenditure was cut to compensate.

Unfortunately that expenditure was a significant t part of demand so national income fell further, revenues fell further and we entered into a downward spiral which, essentially, was reversed only by the public expenditure necessary to arm and fight the war.

So we come to the market collapse of the noughties. Labour’s last chancellor took some tentative Keynesian steps and cut VAT rates to sustain demand. When he left office there were some signs of resumed growth.

Unfortunately George Osborne acted, and continues to act in spite of the clear evidence of the last three years, as though the 30s had never happened and Keynes had never written. His excuse was that, due to Labour’s profligacy, British government debt was so high that unless he raised taxes and cut expenditure “the markets” would lose confidence and refuse to buy British government stock.

It is impossible to say with certainty that this is untrue, but we had been told that, unless the electorate gave a clear mandate to one of the two larger parties (preferably the Conservatives) the markets would lose confidence. It didn’t and they didn’t.

The “profligacy” of the Labour government is only partly true. The standard limit for accumulated government debt is 60% of GDP.  After the financial crisis the Debt/GDP ratio was still  around 68 %, and below those of Germany (73%)France, (77%), and poor old Greece (165%).

What was high in the UK was the rate of current debt accumulation, or deficit, for which the accepted limit is not more than 3% of GDP per year.

Britain’s, at 10%, was over three times above the limit. However, it can reasonably be argued that if you don’t  a high level of accumulated debt you can sustain a higher level of current borrowing  in the relatively short run if it helps get you out of trouble.

What is causing our current deficit is not profligate expenditure but falling tax revenues resulting from the economic collapse.

Ignoring the lessons of the1930s, Osborne’s policy has been to cut government expenditure, in the fond hope that the private sector will take advantage of the alleged confidence of the markets and low interest rates to move in, invest and restore prosperity.

But they  haven’t and wont unless and until they can be sure that there is a reasonable level of demand.

What is needed is Keynesian government pump priming, to fill the potholes, build houses, improve local rail networks (not HS2), invest in renewable energy sources etc, and so create employment, restore growth,  increase tax revenues, eliminate the current deficit and bequeath to future generations a  spanking economic infrastructure  and a healthy society.

Osborne’s “more of the same” will achieve the opposite.

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