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