Is Austerity Killing the UK?

Earlier, the UK released its economic review for April 2012. In it, it was noted that GDP had in fact contracted, putting the UK officially back in recession. This has prompted a litany of ‘See I told you so!’ posts and articles from your usual suspects about the evils of austerity and how it is killing the UK. I’ll pick on Krugman, just because he is the most visible of that crowd. Painting a bleak outlook, he writes:

Needless to say, Cameron and Osborne insist that they will not change course, which means that Britain will continue on a death spiral of self-defeating austerity.

So what is austerity? In an older Krugman Op-ed he describes it as the following:

the notion that instead of increasing government spending to fight recessions, you should slash spending instead — and that this would lead to faster economic growth.

Ok, so now that we have some loose definitions, we can have a look at how austere the UK has been. First, government expenditures:

Source: HMT

A narrow view of the last year:

Source: ONS

Looking at the UK public debt:

Source: ONS (click for larger)

So what the above charts show is increasing public expenditures, and increased public debt loads at record levels both in nominal terms and in terms of percentage of GDP. I’m struggling to see how the UK is guilty of ‘slashing spending’ and contracting fiscal policy. Cameron might talk tough, but like most politicians, he fails to cash the checks his words write.

In the Krugman blog post above, he reproduces this chart from the Economic Review to further highlight the futility in of Camerons’ policies, in his eyes:

Seeing this, he declares that Cameron is such a failure that he couldn’t even match Great Depression UK. So the implication is that the policies undertaken by the UK government during the GD were far superior to the policies taken today. What were those policies? According to The Growth of Public Expenditure in the United Kingdom (1961), public expenditures as a percentage of GDP was 26.1%, 28.8%, 28.6%, 25.7% and 24.5%, for 1930 through 1934 inclusive, the years in question on the chart. In other words, public expenditures declined during the period, as opposed to rising to record levels as they have done during the current depression.

Public debt increased from £7.46 billion to £7.81billion during the period, which represents an increase of just 5%. This is compared with the increase in public debt from £511.9 billion in Jan 2008 to the current level of £1022 billion, an increase of 100%. Furthermore, this paper has this to say about the nature of UK government spending during the Great Depression:

The United Kingdom continued to have budget surpluses over the whole period between 1929 and 1936 (with a tiny exception in 1932). Stabilizing budgets, not the economy seems to have been the priority. If the Great Depression was milder in the United Kingdom, this had definitely not been the consequence of an expansionary fiscal policy.

So why is the UK in such a malaise? The UK did raise taxes on capital gains, the top marginal rate, and the VAT as a part of the austerity campaign. That, combined with inflation that has been regularly reported over 3.5-4% over the last two years has put a damper on the prospects for real growth, as consumers are seeing more of their incomes going to the taxman or to higher prices, leaving less to fund productive activity.

None of this is to say that Austerity, as defined by spending cuts and tax increases is a good thing. The tax increases serve to hamper growth in the long term, and ultimately the whole program attempts to sustain a bloated level of debt. The main point is that it’s difficult to argue that the UK is undergoing austerity, let alone the savage dose of it some would have you believe. Krugman and the rest of the anti-austerity crew can take the position that the UK isn’t doing even more to support the economy, if they like. But to claim that they are downright doing the reverse of expansionary fiscal policy and contracting is at odds with the data. If anything, the UK is engaging in policy Krugman would like, raising taxes AND increasing expenditures. That is halfhearted austerity at the very best.


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