Anti-austerians don’t want a temporary stimulus – they want a bigger state

WHEN Paul Krugman – the spirited New York Times columnist – was in London recently, he accused the coalition of having a hidden agenda. Krugman believes that many British politicians want a smaller state, and are using the recession as an excuse to bring one about. But Krugman is wrong. It’s the anti-austerians who aren’t being honest.

There is nothing hidden about the coalition’s plans, with its overarching rhetoric of “fiscal conservatism”. The coalition has identified the profligacy of the Gordon Brown years as a key reason for the present weaknesses in the economy. Whether they are right or wrong, they are clear about their desire to “balance the books”. In 2009-10 the budget deficit was 11.1 per cent of GDP; in 2011-12 it is due to be 8.3 per cent of GDP, falling to 1.1 per cent in 2016-17.

If anything, the coalition’s dishonesty lies in the opposite direction. These deficit figures are driven more by optimistic GDP forecasts than they are by planned cuts in government spending. Indeed, in recent years the government has acted as though under the command of a textbook Keynesian.

A stimulus is defined as a temporary boost in government spending that is then unwound at a later date. Public sector employment spiked when fiscal stimulus was adopted in 2008/2009. The fall in public sector employment – which has been offset by an increase in private sector employment over the same period – only takes us back to 2008 levels.

There is evidence that the stimulus didn’t work, because the temporary boost did not generate a rebound. Indeed, the only way you can defend the stimulus is by claiming that it was too temporary (or indeed too small).

Every economist knows that for every fiscal loosening there must be a tightening. And herein lies the irony – if advocates think that getting back to the pre-stimulus level is a mistake, then this suggests that a temporary boost was never their intention.
As Milton Friedman said, “nothing is so permanent as a temporary government programme”. The anti-austerians aren’t seeking to fine-tune the economy – they are using the cover of a fiscal stimulus to try to permanently increase the size of the public sector.

Anthony J. Evans is associate professor of economics at ESCP Europe Business School. Twitter: @anthonyjevans