Martin Wolf has a blistering piece in today's Financial Times (£) challenging David Cameron's stubborn adherence to austerity economics.
[Labour] think that by borrowing more they would miraculously end up borrowing less … Yes, it really is as incredible as that.
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).
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.
To reach hundreds of thousands of new readers and to make the biggest impact we can in the next general election, we need to grow our donor base substantially.
That's why in 2024, we are seeking to generate 150 additional regular donors to support Left Foot Forward's work.
We still need another 124 people to donate to hit the target. You can help. Donate today.
16 Responses to “The FT tears apart austerity economics (again)”
Mark Moore
Yes, but if we hadn’t been running a deficit before the crash, the collapse in GDP wouldn’t have given us the ‘record deficit’. Choosing to run a deficit is a risky choice that leaves you hideously exposed if a crash comes. Obviously we don’t know one will come, but to pretend that what Labour did (and the Tories want along with) wasn’t inherently risky is to ignore all common sense.
Now how do we solve the problem? Austerity, or talk of it at least, is clearly not working. But would borrowing more to fund capital spending really work? Would it generate enough growth to give a net positive return? Given the history of farces our government has when it comes to big projects, I would be highly sceptical.
Newsbot9
So basically your answer is to go with what’s clearly not working? Or do you have another proposal?
Mark Moore
Well I’d go with middle class tax cuts, on the grounds that people generally spend better than government, but again there’s a risk that wouldn’t be net positive. Basically my point was that just because austerity isn’t working, it doesn’t follow that anything else would be better. Try something different and you could just as easily make things worse.
Newsbot9
So basically you’re hoping that sort of minor adjustment would work. And no, there’s no evidence for that, given how uniquely bad this recovery is.
GDP is still down 5% from the start of the recession. This number of months after the start of the recession… was at roughly +4% in the one in 1920-1924, +4% in 1930-1934, +5% in 1973-1976, +2% in 1979-1983 and +8% in 1990-1993!
I’m, to put it mildly, unconvinced. Especially when austerity has had the same effect elsewhere, such as in Italy – which had a primary surplus and absolutely didn’t need austerity!
Mark Moore
Ok, so what should we be doing instead? Give me a number, and some examples of where you’d spend. I’ve admitted I don’t know, so tell me some good ideas and I’ll consider them.