|Why is this man smiling?|
The Office for National Statistics estimates that the economy grew by 0.8% in the third quarter (1). Unemployment, although still elevated at 7.7% (2), looks set to continue to gradually fall. This is good news for the millions of Britons suffering in the aftermath of the Great Recession. It also appears to be good news for the Coalition. The Chancellor, George Osborne, has declared Britain is on “a path to prosperity”. He had already proclaimed the “austerity argument is won” and in the words of the Telegraph, “we saved the economy.” (3) The media too has been quick to laud the austerity government. (4) However, in reality, the policy makers should be being condemned for what is a colossal failure. They have not only failed to help the recovery, they have actively hindered it.
The Office for Budget Responsibility estimates that UK GDP is 1.5% lower in 2013 as a result of austerity. The cumulative loss of output from 2010 to 2013 is estimated somewhere between 5% and 6%. In money terms this means nearly £100 billion. Simon Wren-Lewis has calculated that per-household the cost of fiscal consolidation has been £3,500 (5). That is an utter failure.
But it gets worse. These figures understate the costs of austerity in several ways. Firstly they use a conservative multiplier (6). Furthermore they neglect the disproportionate impact of the cuts. As the government spends more money on the poorest in society, cuts have hit lowest income households hardest. The rich, who lost virtually nothing due to the cuts, further benefited from the cut in the top rate of income tax. The figures also do not include the additional, prolonged, damage caused by austerity. These may include the greater inequality already mentioned, long term unemployment and the damage to health. (7)
It should also be noted that this is 6% lost compared to a government that had done nothing to fiscal policy. Instead of damaging the economy the government could and should have had a positive effect.
Of course, now we do appear to be on course for a lasting recovery. Yet although this is obviously good news, the government should not be getting credit. The recession began over 5 years ago. Since then we have had five flat years. The economy was always going to recover at some point, no one disputed that. The argument for stimulus was that the recovery would have been far faster and stronger. The economy is still smaller than before the crash. (8) More than half a decade of growth has been lost. In terms of output, Britain is doing worse than during the Great Depression:
Furthermore, as we are so far below capacity, we should expect rapid growth. The economy is way below trend output. In the long run the economy should return towards its trend level of output. Thus we should be experiencing high levels of growth. Arguably, given how depressed GDP is, 0.8% quarterly growth is actually pretty disappointing. In the words of Alan Taylor “in a bad current state the economy is more likely to grow faster than trend going forward.” (9)
This government should not be taking credit for“saving” the economy. They should be hanging their heads in shame for taking fiscal policy back into the pre-Keynesian era. This is not just numbers. This is unnecessary human suffering. Of course some will argue it was necessary given the deficit and national debt, but that case has been rebuked numerous times. (10) Deficits should go up in a downturn, as the state safety net becomes required. The public debt, as a percentage of GDP, is not at a historically high level. (11) Others might feel that with recovery seemingly taking off, the debate on austerity is irrelevant. But we must learn from the government’s failure. It has made the same mistakes that were made in the 1930s. They must not be made again.
(4) For example http://www.bbc.co.uk/news/business-24018349
(5) http://mainlymacro.blogspot.co.uk/2013/10/why-i-am-obsessed-by-austerity.html I strongly recommend that anyone who wants to know more about the points raised in this post to read some of what Wren Lewis has written on his blog, mainly macro.
(6) Used to measure the proportionate effect of government spending on output. For example, a multiplier of 1.5 means for every £1 the government spends, GDP increases by £1.50.
(7) David Stuckler and Sanjay Basu have written a very interesting book, The Body Economic: Why Austerity Kills, which explores the correlation between austerity and declining health. Although the impact in the UK is undoubtedly less severe than in Greece, where Malaria and HIV have made comebacks, some effect is likely.
(10) See among others: Joseph Stiglitz, Freefall, Paul Krugman, End This Depression Now! Martin Wolf’s column in Financial Times and Simon Wren Lewis’ blog at http://mainlymacro.blogspot.co.uk