Jonathan Portes wrote a critique of my piece on fiscal stimulus on his blog. I felt his response showed we are making some progress in promoting a better understanding of current UK policy. Despite a personal attack that was uncalled for, he agrees with quite a lot of the analysis I have been offering.
Mr Portes agrees that overall public spending has not been cut. He states ” Individual spending cuts do not show that spending is falling overall, and on that Messrs Redwood and Nelson are correct and make an important point”. I am glad we all now agree with the Treasury figures, which are very clear. I have always accepted that capital spending has been cut, and some individual programmes. Total current public spending has been rising in cash and real terms 2010-12. Total cash public spending has also beeen rising overall.
He goes on to say “As yet, so far, there has been relatively little (overall) austerity in public services, with health and schools protected, though local services have suffered”. Education is of course the single largest local service, and has been protected from reductions.
He then points out that there has been austerity in the private sector thanks to tax rises – and I would add thanks to inflation and the price of public services and regulated utilities. I have never denied this and have stressed it in most of my pieces.
The nub of his remaining disagreement with me is over fiscal stimulus. I use the normal definition that a fiscal stimulus is state borrowing to spend beyond its means, adjusted for the cycle. He thinks it is only a stimulus if the state borrows more next year than this year, an unconventional analysis. Each year’s borrowing is new money seeking to create more activity than will be paid for by taxes.
Let us compare his treatment and mine. If the state borrows a cyclically adjusted 4% of GDP in Year 1, 5% of GDP in Year 2 and 9% of GDP in Year 3, then borrows 8% in Year 4, 7% in Year 5 and 6% in Year 6 Mr Portes says there is only a fiscal stimulus in Years 1-3. I say there is a fiscal stimulus in every year. The fiscal stimulus is rising in years 1-3, and falling in years 4-6. More importantly the fiscal stimulus is larger in every year of years 4 to 6 than it was in years 1 and 2. Mr Portes disagrees with this, as there is no stimulus in his world in the later years. His definition is unusual. Even on his definition, as borrowing so far in 2012-13 has been higher than in 2011-12, he should concede there is some stimulus. He does accept the economy has been flat rather than falling over 2012 as a whole so the cyclical affects should not stop this being true.
He agrees with me that if you take an extra pound in tax and spend it in the state sector that is not reflationary, as the private sector can no longer spend that same pound. It is of course possible to argue that in some circumstances there might be a favourable timing difference – the money might pass from someone in the private sector who would otherwise save it, to someone depending on benefits more likely to spend it. But equally the money might pass from someone spending all their income in the private sector who then has to spend less on other things to pay the extra tax, to someone on £150,000 a year in the public sector as a bonus or payrise, or as a contract payment to a well paid private sector consultant, which might be saved. You also need to look at the second round effects. Saved money is not destroyed. If the saver deposits it with a bank the bank might lend it on to someone who does spend it. If the individual invests in a company, the company is likely to spend the saved money.
I agree with his conclusion that “I do think it is important not to exaggerate either the magnitude or the impact of the austerity in the UK”, as long as he is talking about the public sector 2008-12.
Following an exchange with Mr Portes he has apologised for some of the words he used:
“First, and most importantly, I wanted to apologise for what you regarded as a “personal attack”. I honestly didn’t intend it as such while writing it – Ido think the Tresasury view is a basic error – but re-reading it I agree it was uncalled for and unnecessary, so I’ve removed a couple of sentences. Apologies again”.
I accept his apology.