Steve has a post below commenting on the latest Krugman op-ed.
It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.
…
And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.
Steve is annoyed by the approach Krugman takes, but before we get to that what about the facts? First things first – here is the graph.
Looks to me that the UK has regained its peak – but it gets worse. What austerity policy? The UK has a massive budget deficit (according to Scott Sumner 8.8 percent of GDP).
To get a sense of just how expansionary UK fiscal policy really is, compare it to France (5.8% of GDP), Germany (1.0% of GDP), or Italy (4.0% of GDP). Lots of people blame ECB policies for the recession, but Britain is not in the eurozone. Outside the eurozone you have Denmark (3.9% of GDP), Sweden (zero), Switzerland (1% surplus).
Obviously there must be some problem in Britain that isn’t affecting some of its more prosperous northern European neighbors. I suppose if you are a Keynesian you’d say that the housing/banking problems in Britain were worse, and hence you need more fiscal stimulus than Germany or Sweden. Fair enough, but if deficits are already near the largest in the world, trailing only Egypt and Greece, you’re taking a pretty big gamble to commit to an indefinite number of years of even more massive deficits in the hope it won’t be negated by slow NGDP growth produced by the BOE. After all, debts do need to be repaid (or at least serviced.) And the taxes required to service the enlarged national debt will eventually impose significant deadweight costs on the economy.
As Don Boudreaux writes
As for actual spending amounts, I logged a few minutes on the Internet to discover that British-government spending – adjusted for inflation – has risen every year since the start of the financial crisis. This spending in 2011 was 16 percent higher than it was in 2007, and is projected to be even higher in 2012.
Krugman might argue that the U.K.’s budget deficit and government spending should be even higher. But he’s wrong to write as if it’s beyond doubt that the policy pursued today by the British government is indeed one of austerity.
Cutting spending should not be cutting proposed future spending but cutting actual spending. Decreasing the rate at which government spending increases is not austerity. Decreasing the actual dollars being spent would be austerity.
“Cutting spending should not be cutting proposed future spending but cutting actual spending. Decreasing the rate at which government spending increases is not austerity. Decreasing the actual dollars being spent would be austerity.”
More people need to make that point, more often. This “extreme UK austerity” narrative is a hard meme to kill. In the aftermath of the London riots last year, when every man and his dog was blaming the UK’s “extreme austerity programs”
( http://www.google.com/search?&q=london+riots+austerity )
there were also a brave few souls who tried to point out that the proposed austerity measures hadn’t even started to kick in yet … yet they ended up more or less steamrolled by the “Look at the bad things Austerity does!!!” narrative.
No-one can editorialize on what kind of effect austerity is truly having until someone actually tries it – not just talks about it.
spot
31 Jan 12 at 10:02 pm
Austerity is the new lavish party.
Infidel Tiger
31 Jan 12 at 10:11 pm
The Institute of Fiscal Studies is generally recognised as providing the most authoritative and independent analysis of taxes and public spending in the UK.
Have a look at their analysis of spending in the excel spreadsheet at http://www.ifs.org.uk/fiscalFacts/fiscalAggregates and they have an analysis of taxes in excel linked from the same page.
The revenue figures are given in nominal terms and as a percentage of GDP. Revenue fell as a percentage of GDP up to 2009-10, but in the subsequent year rose by 1.8% of GDP and in the year ending this April is forecast to rise by another 0.6% of GDP.
The expenditure figures are given in nominal and real terms and as a percentage of GDP. Now what do they tell us?
In the most recent complete year, spending (“Total Managed Expenditures”) was reduced by 1% of GDP, and by April it is forecast to have gone down by another 0.4% of GDP.
In the most recent complete year nearly all components of public spending actually went down as a % of GDP – social security, health, education, transport, public order and safety, and public investment. What went up are public debt interest repayments – by close to 0.7% of GDP – and they are forecast to go up another 0.3% of GDP by April.
The IFS calculate that if you take out social security and public debt interest repayments, then public spending in the first year of the Coalition government fell by 1.6% of GDP and by this coming April, it will have fallen by a further 1% of GDP.
So already actual figures tell us that taxes went up by 1.8% of GDP and spending on “positive things” went down by 1.6% of GDP, and in the year we are currently in the combined effect of tax increases and active spending cuts is another 1.6% of GDP in terms of changes in the fiscal balance.
This looks like austerity to me.
Now you can do this in real terms, if for some reason you want to ignore the effects of changing population size. While the IFS don’t tell us what happened to real taxes, they show that real spending net of social security and debt repayments went down by 14 billion pounds in the last complete year and a further 13 billion pounds by this coming April – and more after that.
Now should we exclude social security spending? According to http://www.bbc.co.uk/news/10604117 the number of unemployment benefit claimants has roughly doubled since late 2008.
I repeat – this looks like austerity to me.
Peter Whiteford
31 Jan 12 at 11:39 pm
Fair dinkum Peter how the hell can you define austerity when a country drops spending from 10% of GDP to 8.8%. That’s hysterical. It’s like living in some parallel universe.
And by the way, why are you subtracting interest payments as they form part of the spending.
JC
31 Jan 12 at 11:47 pm
JC
When you say ” how the hell can you define austerity when a country drops spending from 10% of GDP to 8.8%. That’s hysterical. It’s like living in some parallel universe”
I have no idea what you are talking about since none of those figures appear in what I said.
Peter Whiteford
1 Feb 12 at 12:03 am
Peter,
This is what you said:
This was in reference to movements in the UK budget. Given that part of the UK budget increasingly has to accommodate larger interest payments and interest payments are part of government spending how do you arrive at this conclusion, keeping in mind that the UK budget deficit is still a whopping 8.8% of GDP?
This:
JC
1 Feb 12 at 12:22 am
JC
Nowhere do I refer to the figure of 8.8% of GDP – tell me where I say this number?
More importantly do you or Sinclair understand the difference between levels and changes?.
.
This was in reference to movements in the UK budget. Given that part of the UK budget increasingly has to accommodate larger interest payments and interest payments are part of government spending how do you arrive at this conclusion, keeping in mind that the UK budget deficit is still a whopping 8.8% of GDP?
Peter Whiteford
1 Feb 12 at 1:07 am
Care to show me where I actually said you referred to this figure. Point it out to me.
It’s pretty clear to most people that I do, as I ask how can you suggest that a drop in spending from 10% to 8.8% over 12 months could even be considered austerity at that level of deficit spending. You seem to causally avoid this.
Again, are interest payments part of the disbursement said of the UK budget or not?
JC
1 Feb 12 at 1:15 am
Even assuming the deficit is being reduced, so what? It’s a de-fe-cit. Spending a hundred and fifty thousand million pounds more than your income doesn’t look like austerity to anyone except statists.
Call me when it’s negative.
Sam Duncan
1 Feb 12 at 1:17 am
not said… side..
JC
1 Feb 12 at 1:20 am
Very relevant article in the UK Telegraph today:
In other words the 24/7 media reporting has so scared the socks off the population they’ve all hidden under their beds and refuse to come out and spend anything.
Bruce
1 Feb 12 at 7:54 am
[...] has come up in the It’s worse than that thread that really needs its own [...]
Micawberesque economics at Catallaxy Files
1 Feb 12 at 8:47 am
It is an accepted fact, by keynesians as much as any others, the UK should not have encountered the GFC with such a large deficit. Indeed it should not have had a defcit at all.
If one wishes to reduce the defcit in the long term you have to have growth. If you reduce Government spending in a slowing economy you simply get a recession.
The UK Deficit as a % of GDP has indeed risen simply because the numerator has increased ( expenditure always increases when the economy slows as taxation revenue slows as well.)
The denominator may well fall.
What we have now is simply more evidence of the fact austerity only works when the economy is going well as Keynes stated in 1937.
We have yet to see it bear the strong economic growth supporters here assert it will have.
To repeat what has been said elswhere. A policy can only be expansionary if it adds to GDP growth not whether it has a budget defcit.
On your Marx
1 Feb 12 at 9:55 am
Show me one Keynesian who criticised Brown and Blair’s socialistic policies that ruined Britain.
Just one.
.
1 Feb 12 at 9:57 am
WTF??? Define away the problem, eh Homer?
Clean up required on aisle 14.
jtfsoon
1 Feb 12 at 10:00 am
You economists must live in a different world than the one ordinary Joes like me live in, then.
I hope your wife doesn’t let you do the household budget.
You can subtract the money you spend on your kids (ie dole payments) and your mortgage bill (ie debt repayment) if you want, but if you’re spending more than you’re earning….
spot
1 Feb 12 at 10:08 am
Here is not one but two.
Pretty basic Keynesianism but in an era of extended growth budgets should have LARGER surpluses each fiscal year.
Keynesianism is always much more fiscally tighter than classical economics in booms. This is why politicians try to avoid it.
Has it yet occurred to anyone that under such alleged expansionary policies the economy is not roaring but going backwards?
If the public sector is detracting from growth the policy cannot be expansionary.
On your Marx
1 Feb 12 at 11:42 am
hahahahahahahahahhahahaha
Any examples of this discipline, Homer?
Homes, you’re wanted in aisle 7. Customer wants help in figuring out which diapers to buy.
JC
1 Feb 12 at 11:46 am
Yet you continually criticise Howard for a non existent “structeal defecit”
So why did Newt and Clinton balance the budget but Obama is requires debt monetisation?
Obama and Pelosi built trains to nowhere and have blocked industry development through regulation.
WTF?
Then what is the point of public sector spending at all?
Clean up on aisle 3.
.
1 Feb 12 at 11:49 am
You claim that the last Government did not have a structural deficit however, Treasury, RBA, OECD, IMF. World Bank not to mention various private sector forecasters/analysts say there were?
They had a large cyclical surplus which hid a growing structural deficit hence the reason why they added to GDP in the last years and exacerbated inflationary forces.
Clinton had a surplus as he should given the state of the economy.
Obama has never had a strong economy. He stopped the rot but that was all. He inherited a deficit of $1.2T so it was scarcely likely he would have a large stimulus.
It is simple macro-economics. If the public sector is detracting from GDP it is not expansionary.
I am not to blame if you do not understand this simple concept.
On your Marx
1 Feb 12 at 3:08 pm
Homes:
Do you think there is any possible link between you now doing a job you most likely don’t wish to do and as against your desire to do something else has any link to a rabidly stupid positions you take on the most obvious things?
JC
1 Feb 12 at 3:12 pm
So by definition all expansionary fiscal policies increase GDP. No such thing as a failed attempt at fiscal expansion?
You write some real crud, Homer but boy, that software you are using to correct your spelling and grammar must be as advanced as HAL from 2001.
jtfsoon
1 Feb 12 at 3:14 pm
In Homer’s world, adding to GDP can be a bad thing. Fme
jtfsoon
1 Feb 12 at 3:17 pm
yea… Homes I’m wondering if you could lend it to me. I’ve no issue with diction like you, but I’m really to lazy to spellcheck.
JC
1 Feb 12 at 3:24 pm
Who? Which private forecasters?
They had a surplus for 8 years. You are full of shit. You are criticising them for doing something you tell others to apsire to.
The US economy wasn’t really in great shape when he became President.
3 years into the game, none of this is his fault?
No he didn’t. He got deflation during a fiscal stimulus and U6 over 16% for well over a full year.
I like how Homer thinks these things are path dependent. Someone tell John Key.
So Obama’s failed stimulus was not expansionary? I thought you just inferred it was path dependent.
.
1 Feb 12 at 3:41 pm
[...] isn’t a good look for the UK government’s rhetoric. On that front I have no sympathy. As we indicated before Cutting spending should not be cutting proposed future spending but cutting actual spending. [...]
UK double dip recession: Austerity disproven? at Catallaxy Files
26 Apr 12 at 11:46 am