Economics of Independence Westminster Mismanagement

Is the UK’s austerity myth about to crumble?

Screen Shot 2015-06-06 at 12.07.48Predicting the end of austerity after a majority General election victory for the party that campaigned on being more austere than the other austerity party may seem a little strange. You might actually think it’s wishful thinking but we may be about to see a seed change in economic thinking politically to match the anti-austerity credo already dominating the economics community.

If you believed the Twitter trolls, then my views on austerity damaging economic growth belong on the lunatic fringe of economic commentary.  However, although anti-austerity is certainly not yet part of the political mainstream in the UK, it is very much aligned with the views of most eminent economics and global economic bodies. Earlier this year the Centre for Macroeconomics surveyed leading economists and found that two out of three disagreed with the proposition that the previous coalition Government’s policies since 2010 “have had a positive effect” on the economy. Only 15% thought that austerity had had a positive effect but none agreed strongly with that proposition. You could argue cuts were a

Steve Keen, Claims Osborne has a Kindergarten level of economic understanding

Steve Keen, Claims Osborne has a Kindergarten level of economic understanding

necessity in the immediate aftermath of the crash to avoid a market collapse, but not for the last few years. Several of the world’s leading economists have been scathing, with Steve Keen calling Osborne’s fixation with balancing the budget as having a “Kindergarten level understanding of economics” and Paul Krugman coining the phrase “Austerity Delusion” when he wrote “Harsh austerity in depressed economies isn’t necessary, and does major damage when it is imposed”.

 Indeed this week the OECD, in its latest Economic Outlook report, stated that “Global growth in the first quarter of 2015 was weaker than in any quarter since the crisis and that productivity growth continues to disappoint, reflecting in part tepid business investment which has weakened the spread of new technologies”.  It goes on “increases in capital spending are needed to push economies onto a higher growth path. For policy makers, translating investment into sustained growth also requires paying attention to low-wage workers, as well as tackling the consequences of rising inequality for education, a key factor undermining growth in the longer term”.

Ok, so the crisis is over, we are in recovery mode and we need to increase capital expenditure, invest in education in poorer communities and pay low waged workers more. Well the problem is that the UK just gave a mandate to the Tories to deepen austerity when it’s not only not necessary but actually likely to be counter-productive. There are policies we could adopt, such as targeted capital expenditure allowances that would encourage business to spend, knowing they would get some tax benefit further down the line.  Increasing R&D tax credits would stimulate that all-important productivity and, raising the minimum wage to the Living Wage would be worth a billion pounds a year to Scotland’s budget in both increased taxes and savings on benefits. All of those suggestions are in line with the OECD advice on stimulating growth but increase Government expenditure in the short term to generate longer term revenue growth, but that is not possible under austerity.  Although the last election provided a mandate for cuts in England, there no such mandate in Scotland. Even so, the powers to follow an anti-austerity budget will not be devolved.Earlier this week The International Monitory Fund (IMF) published research that suggested austerity measures in the short term to deal with the UK’s debt mountain may do more harm than good. It seems that living with large debt in order to protect people-led economic growth has to become the new normal. The IMF report states the “optimal” policy involves “living with high debt”. Which is preferable to introducing “policies to deliberately pay down the debt” because the costs were likely to outweigh the benefits – as the money need to be cut elsewhere.

So where did this obsession for austerity come from? Keynesianism used to dominate economic thinking and, in a nutshell, it supported increased government spend in time of recession to stimulate growth. This was most aptly characterised in Roosevelt’s New deal that is credited with America’s longer term recovery from the Great Depression. His focus on the “3 Rs”: Relief, Recovery, and Reform contrast starkly with the UK governments 3 C’s: Cuts, Caution on investment and Carelessness in regulation.  Thatcher certainly raged against public sector waste and I admit it there was low efficiency in increased spend when the public sector was as bloated and badly managed as it was in the 70’s. Different era, different public sector.

The current austerity doctrine has been driven by an influential paper by two American economists, Reinhart and Rogoff, which demonstrated that public debt of more than 90% of

Thomas Herndon, student who found adding mistake in austerity research used to justify cuts!

Thomas Herndon, the student who found spreadsheet errors in austerity research paper used to justify cuts!

GDP slows growth. Their work was cited by the IMF and the UK Treasury in initial justifications of austerity policies that have driven poverty, unemployment, benefits cuts and a plethora of anti-cuts protests. Now all of that might have been worth it had it stopped another massive collapse in the economy, but Reinhart and Rogoff’s work hasn’t just been debunked, they themselves have admitted it was wrong after Thomas Herndon, an economics student writing an essay on their report, found basic errors in the spreadsheet. Honestly, I didn’t make that up!

So summing up, 66% of the UK’s leading economists believe that austerity has actually harmed the economy, most of the world’s leading economists think austerity is daft. The OECD and the IMF are calling for investment to grow and the original report that suggested austerity was required was just wrong. The UK, however, is committed to austerity and are seeing deflation and low growth, including the biggest slump in service sector performance since 2011 and a widening trade deficit due to the comparative strength of the pound.  The Tories will now reign back on austerity claiming they have sorted the economy so no longer need to cut so deep.  If not, then it is Cameron, Osborne and UK treasury that will be left sitting on the lunatic fringe of global economic policy thinking.

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About the author

Gordon MacIntyre-Kemp

Gordon MacIntyre-Kemp is the Founder and Chief Executive of Business for Scotland. Before becoming CEO of Business for Scotland Gordon ran a business strategy and social media, sales & marketing consultancy.

With a degree in business, marketing and economics, Gordon has worked as an economic development planning professional, and in marketing roles specialising in pricing modelling and promotional evaluation for global companies (including P&G).

Gordon benefits (not suffers) from dyslexia, and is a proponent of the emerging New Economics School. Gordon contributes articles to Business for Scotland, The National and Believe in Scotland.


    • Seed change is to do with the need for crop rotation – different crops take different nutrients from the soil and so every so often you need a seed change for an individual field. However over the years the terms became sea change and referred to a change in the weather as shown by stormy seas etc. I think the medieval version “seed change” makes more sense so I use it even though most would say sea change.

  • I’ve yet to find any economist with the balls to commen ton
    Danny Blanchflower has spluttered against the idea, but is completely unable to articulate why.
    At a meeting in Stirling University professor David Bell agreed that “it would be perverse if the banks didn’t fund SMEs” as a result of this policy being implemented; but is unable to say so in writing.

    The banks control all the economists, even those “on the left”; why do universities refuse to reveal how much funding banks give them?

  • Austerity is needed for two reasons.

    1. Climate change

    2. Resource depletion

    Economy can’t grow because of these reasons. Of course elite can’t admit that we are judged to degrowth so they are executing austerity politics because they know austerity damages economic growth.

  • Assuming they legitimately care about the whole economy.

    What if austerity is just an excuse to “shrink the state”? Or as I see it, what if austerity is just an excuse to get a cut of all the taxes for their rich mates?

  • To anyone who runs their own business the idea of austerity is ridiculous. Can you imagine applying the same rules to your business that the chancellor has to the country? It doesn’t take a genius to work out that there’s more to austerity than meets the eye.

    The answer to why this policy is being inflicted on the country is a simple one. There’s money to be made from the poor. The banks are making fortunes on expensive loans to those who are in a desperate position. With social spending cut back beyond the point of the most modest existence people have no choice but to look elsewhere for the shortfall. Banks and loan companies have plenty of high interest short term products just waiting for them.

    What’s happening is very similar to the way Africa has been treated. Lots of money on offer with crippling interest that causes the need to borrow more. Even when the loan has been paid off several times over the hugely inflated interest keeps the borrower in a spiral of debt.

    The other advantage is control, not only of the poorest but of the majority of our society. Fear is the strongest weapon a government can use against its own people and the fear of being next in the firing line keeps those lower to middle earning households on side. It allows those better off to believe that the poor are the route of all the problems, the disabled are ‘milking it’ and what they read in the tabloids is true.

    How has it come to this? The poor standard of politician that get churned out of our universities who think that the only qualification they need is a degree in politics.

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