The FT tears apart austerity economics (again)

Martin Wolf has a blistering piece in today's Financial Times (£) challenging David Cameron's stubborn adherence to austerity economics.

Martin Wolf has a blistering piece in today’s Financial Times (£) challenging David Cameron’s stubborn adherence to austerity economics.
He begins by quoting Cameron:
[Labour] think that by borrowing more they would miraculously end up borrowing less … Yes, it really is as incredible as that.
And here is Wolf’s response:
What truly is incredible is that Mr Cameron cannot understand that, if an entity that spends close to half of gross domestic product retrenches as the private sector is also retrenching, the decline in overall output may be so large that its finances end up worse than when it started.

Wolf then turns to the argument repeatedly put forward by the coalition as well as a rabble of right-wing interest groups that spending under Labour was “out of control”.

This deficit didn’t suddenly appear purely as a result of the global financial crisis. It was driven by persistent, reckless and completely unaffordable government spending and borrowing over many years.

Wolf busts this myth in a single blow:

In 2007, according to the IMF, UK net debt – at 38 per cent of GDP – was the second-lowest in the Group of Seven leading economies. These levels were also exceptionally low by UK historical standards (see bottom left graph).

So what caused the “record deficit” cited by Cameron?
Some think reckless spending explains the jump in government spending from 40.7 per cent of GDP in 2007-08 to 47.4 per cent two years later…No: the collapse in GDP, relative to expectations, caused the jump in spending and decline in receipts, relative to GDP.
Debt as a percentage of GDP
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