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
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”.
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.
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
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.