Austerity can’t have hurt UK growth because austerity hasn’t yet begun

Andrew Lilico
IN ORDINARY parlance, “austerity” means a period of cutbacks, spending reductions, and debt being paid down. So when voters hear talk of government austerity, most of them assume that’s what the government is doing. When they hear (a few) economists saying that weak growth has resulted from “austerity”, voters think cuts to public sector pay and public sector lay-offs are a cause of weak growth, and that those economists think either the pace of cuts should slow, or even that they should be reversed.

In fact, total government spending is going up and the government isn’t paying off debts at all. It is accumulating them at a record rate. There isn’t anything happening, yet, that the public would call “austerity”, if it understood the term properly. Journalists like Fraser Nelson and the politician John Redwood, therefore, perform an important service when they note that there hasn’t really been any “austerity” in that sense – yet.

They might also go on to note another thing about those few economists who allege that slow growth is the result of austerity. Mostly, when they urge that “the pace of austerity should slow”, or that there should be additional “fiscal stimulus”, they don’t mean that there should be slower cuts to public sector pay, or fewer similar cuts to what economists call “government consumption spending”.

What they actually mean is this: first, the government has raised taxes too fast, and should have retained the flexibility to introduce temporary tax cuts as required, without threatening its medium-term deficit reduction targets; and/or, secondly, that the government has cut spending on road-building and other infrastructure too fast, and should try to find some one-off investment schemes to take advantage of low interest rates.

Yet despite the public confusion, and the public service done by these few commentators prepared to say the Austerity Emperor has no clothes, some senior economists prefer to attack the truth-tellers. On Sunday, the respected head of the National Institute of Economic and Social Research, Jonathan Portes, devoted a whole blog to attacking what he see as the “errors” made by the likes of Nelson and Redwood.

Portes said it was an “error” to say that the fact that the government deficit is rising, not falling, means there is no austerity. That’s obviously not an error in the normal sense of the word “austerity”. But Portes wanted to use “austerity” in a technical sense to mean measures likely to make the economy larger rather than smaller. Well, he’s wrong on that too. Portes is a “Keynesian” economist. And in standard Keynesian models, a deficit is what’s called an “injection” into the economy – stuff “injected” makes the economy bigger. The naïve version of the theory normal in political debates says the larger the deficit (the more government spending is higher than taxes), the bigger the injection. So if the government is running a huge deficit, as it is now, that means GDP ought to be going up. It isn’t. And this is pretty good evidence that the theory is wrong. Nelson and Redwood are right to point that out.

Portes also says Nelson and Redwood have no basis in “economic logic” for asserting that spending cuts should be any less a growth-damaging way to cut a deficit than tax rises. But Portes is just wrong. Tax rises damage growth. Cuts to consumption spending (like public sector salaries, consultants’ fees, IT support) or benefits spending mean more growth. That’s true both in standard theory and extensive empirical studies.

Government consumption spending is, alas, still going up. But it’s scheduled to start being cut seriously now. Spending cuts are a potential cure for this economy, like an operation is a potential cure for a man with cancer. Our economy is like a man that fears the operation, so keeps putting it off. When he gets worse, people say: “Ah, what’s making him sicker is that he has an operation planned. To get better, he should cancel the operation.” No. What’s making him sicker is that he keeps putting it off. And if he cancels the operation, he may well die.

We need to cut government consumption spending so the UK economy can grow faster, so that households can in turn service their mortgages, so they don’t default and bust the banks. It doesn’t help public support for that when respected economists attack those correctly pointing out that such spending cuts haven’t happened yet.

Andrew Lilico is a columnist for ConservativeHome.