Nailing left wing austerity lies

Keynesians have been in confident assertive mood recently, claiming that the facts are bearing out their long-standing calls for more fiscal stimulus to "end this recession now", as their cheerleader-in-chief Paul Krugman put it.

They claim that the divergence between US and UK growth rates proves their case.

Until Osborne choked off growth with his reckless spending cuts in 2010, they say, the UK was on the path to recovery thanks to Labour's loose fiscal policy, including a temporary VAT cut.  The chickens of austerity are now coming home to roost, including a stubbornly persistent deficit.

Contrast this with the US, where Obama resisted calls to start cutting the deficit, and a recovery is gathering strength.

This Observer article is typical of the breed:

Gordon Brown at the helm, steered the world economy back on course, with the aid of a $1 trillion collective stimulus. Brown wanted to maintain the stimulus: the US government did, but the 2010 coalition did not, in the name of budgetary consolidation. The US budget position improved dramatically with economic growth while the British deficit, in the absence of decent growth, continues to be an embarrassment.

The problem is that the figures don't support this version of events.  Look at the chart showing UK and US public sector deficits as a % of GDP:

The supposed difference between austerity-obsessed Brits and spendthrift Yanks is all rhetoric and perception.  If anything the US has adopted a tighter fiscal policy than the graph suggests: there have been big cuts at state level which are not reflected in the Federal deficits shown here.

The reality is that the two countries have followed a very similar path.  They entered the recession with their public finances in remarkably poor shape given the boom that preceded it and the crisis sent deficits soaring.

Both started out with some Keynesian stimulus but eased off as political concerns over the scale of borrowing took hold.  In the last couple of years both countries have adopted a middling course, neither attacking the deficit or adding to it as Krugmanites demand.

In fact the US has made the first serious move to cut deficits dramatically as their "sequestration" law kicked in this year to lop $85bn from Federal spending.  But the US is still growing more quickly than Britain.

So, the idea that British growth is slower than the US because we went for austerity and they didn't is a myth.  There are plenty of other possible explanations for the US currently outperforming Britain.

I would highlight one - US house prices were allowed to fall back to their pre-boom levels and the banks purged a lot of bad debt in the process.  The process is widely believed to be over and housing is now contributing to growth.  By contrast the UK has done everything in its power to prevent this house price boom unwinding and is consequently stuck in low growth mode - plateauing rather than recovering (see The stalled UK economy in one chart).

There are almost certainly multiple factors at work.  Another UK-US contrast relates to energy: they have fracking and gas prices 1/4 of UK levels, we have declining North Sea oil production shaving a % point off GDP.

One thing's for sure - the simplistic nonsense about "it was austerity what did it" needs to be laid to rest.


From our website:  UK and Spanish tax implications of a rental property in Spain

And winner of the worst government policy of the year is . . .

There have been plenty of contenders for the year’s worst (UK) government policy.  The coalition seems to have inherited Labour’s desire to meddle, fiddle and tweak and the uneasy marriage of Lib Dem lefties and nominally right wing Tories has been a recipe for fudge and confusion. 

This has led to a bumper crop of terrible policies including:

-          George Osborne’s “tax cuts for employment rights” policy was designed to please right wingers but was just another politician’s wheeze which backfired at the taxpayer’s expense (and confirmed that George’s scary similarity with Gordon – see “Oh No it’s Geor-don!”);

-          Ed Davey’s horrible energy bill which slaps an extra £100 onto fuel bills for a hotchpotch of measures which will damage the UK economy but do nothing to “combat climate change”.  In a world where India and China are building new coal-fired stations every week, the UK messing around with wind farms and subsidising loft insulation is an expensive irrelevance.  Davey’s bald-faced assertion that his measures will eventually reduce bills by £94 (compared to what they would have been without the bill) was political lie of the year ;

-          Separately the £2bn “climate aid” pledge to assist with climate change projects in the developing world had massive-waste-of-money written all over it;

-          The way the Treasury rowed back on the child benefit cuts for rich people was also depressing.   The original cut, announced last year, was the right thing to do but was badly botched from the start, penalising single-wage households.  The efforts to undo the damage have watered down the savings and added another huge layer of complexity to the tax system (see this if you don’t believe me see Couples face “who buys toys” quiz by taxman to get a flavour of the madness);

-          Kicking Heathrow airport expansion into the long grass (yet again) while simultaneously making UK air passenger tax the highest in the world, was a great example of political expediency trumping the long term economic interest of the country; and

-          Getting control over Labour’s crazy “open door / open wallets” immigration policy is important but the coalition have set an arbitrary target of limiting non-EU immigration and Theresa May is trying to reach it by clamping down on students from abroad and skilled workers business needs.  Leaving the EU and restricting welfare payments to citizens who have earned it would be a better bet (see EU’s migrant rules prove the referendum case).

So what could be worse than this lot?  Well my nomination as worst government policy of the year is Minimum Alcohol Pricing.  It’s at the White Paper stage now so not law but it will be soon, particularly given that the PM has thrown his weight behind it (so we can’t blame the Lib Dems for this one).  It may not be the policy with the most serious bad consequences but it is truly awful for lots of reasons which I describe here:  Minimum alcohol price: Cameron’s dodgy dossier

From our website:  Do you need to submit a Spanish tax return?