In Defence of Austerity

Austerity has been the feature of many western nations since the financial crisis; some have chosen to adopt it and others have been forced to have it. Britain, whether we wish to admit it, chose to pursue austerity. A choice was given to the public and it rejected Labour’s road of continued unfunded budgets. Prior to the 2010 general election, the anti-austerity critics were already out in force and the message was clear: cutting the size of government and the level of its spending will increase unemployment, destroy any chances of growth and wouldn’t even address the deficit. They’ve been wrong on each and every one of them, welcome to a new era of the relationship between the British state and the citizens who it governs.

A prime example of the of how wrong the anti-austerity campaigners have got it is employment. When the coalition took power in 2010 the critics were quick to conclude the extent of the damage the Tory plans would cause; Larry Elliott was one of many to jump on the early Treasury report that by 2015 over 1.3 million could be lost and that at least 0.8 million would be lost as a direct consequence of the reduction in the size of the state – both public and private. It had been one of the key messages of Gordon Brown’s campaign: the Tories will cost the economy a million jobs, why abandon the road we’re on? Oh, how wrong they were. As of 2015, the labour market is at an all time high, there are more people in work than there were in 2010, the unemployment rate has dramatically fallen to 5.7% – full employment is one of Osborne’s promises for the next Tory ministry and truth be told: he could very well manage it.

In total, since 2010, 2 million jobs have been created. This has been entirely driven by the private sector, the public sector has lost 631,000 jobs since the financial crisis around 1 in 10 of the departmental workforce while the private sector has created 2.2 million. Turns out that just because the government is being reduced in size it doesn’t mean all hell will break loose, even pay is now rising at nearly 2% above inflation. While underemployment is an issue, the concern of zero hours contracts has been blown out of all proportion. Out of a workforce of over 30 million, only 0.7 million are zero hour contracts, a third of these are not looking for more hours and another fifth are students: we’re down to about 0.4 million individuals, it is a tiny fraction – one we shouldn’t ignore, but we also need to keep things in perspective here. The critics have now turned to saying that we would have better productivity and higher wages had we not adopted austerity. It is fascinating to see how the criticism has changed once the evidence is put before them: no longer is it that austerity will lead to unemployment, it is now that austerity has stopped us from improving as quickly as we would have done had we not adopted austerity. The goal posts have moved and the anti-austerity campaigners still maintain they were right all along despite changing the terms by which they choose to judge our economic performance.

On Krugman’s concern that confidence in private spending is little more than believing in fairies it is now obvious the fairy has done her magic. Putting the squeeze on the public sector may mean one source of private sector demand is reduced but, given an environment of fiscal stability, ideal market regulations and global reach, the private sector can not only survive but flourish. It has been a great mistake on the part of our modern Keynesians to have assumed so much of the state and so little of the market; the state needs direct sources of income in order to provide growth – either by taxing, borrowing or printing – whereas the private sector has the ability to grow driven by innovation, trade and production (yes, investment and consumption are forms of income in essence no different to taxes etc.. but they are only acquired voluntarily because the two parties reach an understanding: the same – we know – is not true of the state). And this is why those opposed to austerity have been wrong on every prediction they made about the UK: they simply could not predict the behaviour of companies and investors and, by extension, the markets. In a way this has been a rebalancing exercise, we now have a British economy with a larger private sector and a smaller public sector, at the same time society has not collapsed – bizarrely a BBC poll revealed that in the 5 years since the financial crisis people have found a number of public services have not got worse and in some cases even improved, including: bin collections, parks and libraries, GP surgeries, schools and bus services – suggesting that the natural balance between private and public is still yet to be really reached and that we did not reach it during the Blair years. Yet again, just like with employment, the private sector has ridden to the rescue and businesses, consumers and individuals are driving growth, not government.

With the budget, Osborne has not got rid of the deficit and has failed in this regard. He has not cut deep enough, quick enough or harshly enough, but the deficit is now half the size it was as a proportion of GDP. That is, as the Keynesians would also point out if it had been achieved through state spending spurring growth, what matters. If your economy is larger it is easier to deal with debt, so one way to reduce the deficit – not in absolute terms but as a percentage of GDP – it to use public spending to inflate the size of the economy. On these terms Hollande could reduce the French deficit further by taxing various sources – as he has done – and then increasing both structural and capital spending and letting the multiplier effect et al. do its magic and expand the French economy. Indeed, the French have posted better than expected 2014 deficit figures and expect growth to beat predictions. Despite this apparent success, the French had a much smaller deficit to begin with – Hollande inherited one smaller than Cameron – and businesses aren’t confident, in fact unemployment is still rising. The French are still a drag on the EU bloc’s overall growth. So, Osborne has not performed as well as the French have on the budget, though he has still reduced it by around a half, but, unlike the French, he has been a chancellor of a quicker growing economy which has under gone a jobs miracle.

Austerity will, as long as it is followed, consolidate our fiscal stability, the bond markets will be confident, Sterling will retain its position as a currency of choice and Britain will remain an attractive proposition for those businesses and individuals concerned by the uncertainty of the state of multiple European economies. The Keynesians may argue that it is better to have a stronger economy riding on large public debt than slashing debt and the deficit but in doing so throw us into yet another recession. The trouble is, however, that pursuing austerity has not led to recessions here in Britain, it’s been a bumpy road and we have only marginally avoided a double dip but – as we’ve been reminded over these past few weeks – the medicine is working.

 

Laurence Smith

Economy and Westminster

 

Source Links:

http://www.telegraph.co.uk/finance/economics/10007727/IMF-steps-up-call-for-Osborne-to-slow-down-austerity-plans-as-row-escalates.html

http://uk.reuters.com/article/2015/04/08/uk-france-economy-budget-idUKKBN0MZ28120150408

http://election2015.ifs.org.uk/earnings-and-employment

http://www.theguardian.com/uk/2010/jun/29/budget-job-losses-unemployment-austerity

http://www.bbc.co.uk/news/uk-24454006

http://krugman.blogs.nytimes.com/2010/07/07/self-defeating-austerity/?_r=0

http://www.insee.fr/en/themes/info-rapide.asp?id=105

http://www.france24.com/en/20150127-france-unemployment-hits-new-record-high-december/

http://www.bbc.co.uk/news/10604117

http://www.nytimes.com/2011/03/25/opinion/25krugman.html?adxnnl=1&adxnnlx=1429725868-mJTsKKKKHtBGy89G55Reyw

http://www.euractiv.com/sections/euro-finance/french-deficit-takes-centre-stage-eus-winter-forecast-311880

http://www.ft.com/cms/s/0/9f242cd2-e337-11e4-aa97-00144feab7de.html#axzz3Y43vYZku

http://www.bbc.co.uk/news/business-32346214

http://www.icaew.com/en/about-icaew/what-we-do/business-confidence-monitor/latest-business-confidence-monitor

http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&cad=rja&uact=8&ved=0CDQQFjAE&url=http%3A%2F%2Fwww.bankofengland.co.uk%2Fpublications%2FDocuments%2Ffsr%2F2014%2Ffsrfull1412.pdf&ei=mOo3VZaSEcvfywOO2YDICQ&usg=AFQjCNFjWFrsZCQ1QcIUH5JG37CklNBxuA&sig2=LTI058RQYVCCCgF-UKKkBA http://www.ons.gov.uk/ons/rel/bus-invest/business-investment/q4-2014-revised-results/index.html

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s