The US and the UK – different approaches to fiscal stimulus

 

 RBS published some interesting figures on the US. Over the last twelve quarters US public spending has fallen in ten of them, making a total decline of 6% over the period. Despite or because of this tightening of the spending stance, the US economy has grown overall  by 4.8%.

In the UK the last eleven  quarters (since the Coalition arrived)  have seen a significant rise in real public spending but only a 0.4% increase in output. In most quarters in the UK the public sector has made a positive contribution to output growth.

Those who argue the US has grown faster because Mr Obama has avoided austerity whilst the Coalition has gone for it should look again at the figures. Mr Obama has not increased Federal spending by sufficient to offset state spending declines, so the US has been much tougher on public spending overall than has the UK.  Why haven’t the US cuts in spending led to economic decline, as some argue here?

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20 Comments

  1. Conrad Jones (Cheam)
    Posted February 1, 2013 at 12:10 pm | Permalink

    David Cameron recently said:

    “So though this government has had to make some difficult decisions, we are making progress. We’re paying down Britain’s debts.”

    Does he mean in real terms?

    What figures was he basing this statement on? Surely, the National Debt is increasing isn’t it?

  2. Posted February 1, 2013 at 1:33 pm | Permalink

    I guess you mean growth will help reduce the deficit ‘ as a percentage of GDP ‘ rather than just reduce it ?

  3. James Reade
    Posted February 1, 2013 at 1:45 pm | Permalink

    The usual point that you’re hopefully expecting.

    Where is the cyclical adjustment?

    The US economy has grown most of those quarters hence is much more likely to report a fall in spending.

    The UK economy has shrunk for 4 of the last 5, and hence is much more likely to report an increase in spending.

    Reply: The UK planned an increase in spending before the economy flatlined: indeed the OBR forecast good growth by now. The US planned a cut and the economy grew.

  4. Robert Pay
    Posted February 1, 2013 at 2:28 pm | Permalink

    Yes, there have been real cuts in expenditure here in the USA where public sector people get laid off. The BBC and the Labour Party seem to claim continually that the fiscal stimulus here has been different to the UK and speak as though the spiggot has been turned on. This is not the case. At a state level unfunded pension liabilities are being addressed unlike the UK.

    Until we get a real narrative on what happened in the noughties, i.e. no growth that was not the private and government debt binge – in short a classic bubble that a child could spot (not Brown or Balls or our blind regulators but every banker I knew did,) we will never address the issues. The Brown/Balls bust or triple BBB which is where our credit rating will be with Balls as Chancellor!

  5. Tad Davison
    Posted February 1, 2013 at 2:43 pm | Permalink

    ‘Why haven’t the US cuts in spending led to economic decline, as some argue here?’

    That convinces me still further, that a lot of Westminster politicians, especially those on the opposition benches, have no real grasp of the truth of the situation. But Obama isn’t quite the wizard some believe him to be. US debt is still massive, as is our own in the UK, and neither has room for complacency. We have to lose it, or risk losing much more in the years ahead.

    Cutting public spending is but one necessary measure, to bring the economy into line, but it won’t solve the problem on its own. We need a dynamic economy. One that makes and provides goods and services to countries that can still afford to buy them, which naturally rules out quite a number in the EU. Yet these same politicians already referred to above, still keep trotting out the old garbage about the British jobs that depend on the EU, whilst ignoring the greater number of EU jobs which depend so heavily on the UK! In that regard, we’re in a position of strength, and can use it as a bargaining chip to get a better deal, although given all the sneaky double-dealings that have gone before, I still feel we’re better off out, than in. That way we can’t again be seduced into its orbit.

    I find it wholly disconcerting, that so many of these ill-informed people are in positions where they can make crucial decisions that have a deep and lasting effect upon the rest of us, yet they don’t really get it. It’s still right and proper to use that hackneyed phrase, ‘it’s like giving the car keys to those who crashed the car in the first place’. Labour would indeed borrow more, they’ve admitted as much, which would undo all the graft that has been done since 2010. They’re just a nonsense, and a dangerous nonsense at that.

    Interesting though, to see today, there’s reported to be a plot within the Tory party, to get rid of Boy George. I hadn’t got wind of this one beforehand, but I have my suspicions as to the identity of the conspirators, as well as their motives. I think we could do worse than replace him with our host. I’d back JR to the hilt. I trust his analysis and his sound, balanced judgement, far more than I do most of the others, and it sure would turn the tide back in the Tory party’s favour if he were chancellor!

    (and yes, I know who gets to read this blog!)

    Tad Davison

    Cambridge

    • Bazman
      Posted February 1, 2013 at 3:56 pm | Permalink

      Arise Sir Tad of Cambridge Lord of the Fens. U.S. cuts in defence spending have hit the economy badly and if you think there is any mileage in threats, especially economic threats to other countries, you are in wonderland, but never mind as you do not need a job do you?

      • A different Simon
        Posted February 1, 2013 at 6:09 pm | Permalink

        Bazman ,

        Our host can talk about the differences in economic stimulus and actions which the authorities at the top can take .

        From what I’ve seen , what really distinguishes the two countries is what happens from the bottom up .

        The UK has got white van man , a hero of mine , predominantly what used to be termed working class .

        The US has white van man and in addition has an entrepreneurial middle class which embraces risk and starts local businesses which employ people and help create communities .

        Seems to me that the extent of ambition of middle class parents in the UK is to see their children work for big companies . In short the UK middle class appears to me to be a massive damp squib .

        Are British citizens equipped for life in the 21st Century ?

        • Bazman
          Posted February 3, 2013 at 4:18 pm | Permalink

          They want to be bankers.

  6. Acorn
    Posted February 1, 2013 at 2:44 pm | Permalink

    “The new numbers the Bureau of Economic Analysis released on fourth-quarter economic growth have received considerable attention for the clear damage that falling government spending did to the economy. According to the BEA, “government consumption expenditures and gross investment” knocked 1.33 percentage points off the total change in economic growth. If government spending had just been neutral — that is to say, if it had neither contracted nor expanded — the economy would have grown by 1.23 percentage points rather than shrunk by 0.1 percentage points.

    But this isn’t the first time that total government spending and investment has been a drag on growth. It pulled growth down by 0.67 percentage points in 2010, .34 in 2011, and .33 in 2012. This is the strange, counter-intuitive truth of government policy over the last three years: We haven’t been spending enough to keep growth steady, much less help it along.” (Washington Post).

    The other trick the US uses is that spending and debt issued by the like of Fannie Mae, Freddie Mac (subsidised housing agencies etc), are not considered debts of the federal government. Hence US national debt goes up a lot more each year, than the government budget deficit for the year. Off balance sheet financing American style.

  7. Simonro
    Posted February 1, 2013 at 3:11 pm | Permalink

    It really is very simple. Spending less, and increasing taxes does not help a country out of a demand led slump triggered by a private debt led financial crisis.

    For once the mop haired pretender in London has got it right. Stop talking about austerity, and start investing in things the country needs. If you (as a government) had done this from the start you might have stood a chance of winning a majority at the next election. As it is, you’ll be facing the country with at least 70% of the electorate worse off than when you started, and still trying the tired 5-year-old whine that it’s all Labour’s fault, and Europe’s fault, and anybodies fault but that of your ideologically hidebound party and the chancellor it put it’s faith in.

    • Edward
      Posted February 3, 2013 at 10:18 am | Permalink

      Simonro,
      Your simple solution is therefore to spend more and tax less.
      With our annual deficit of approx £150 billion adding to a debt of over a trillion, both of which are rising, just how will your policy be paid for ?

  8. Posted February 1, 2013 at 3:53 pm | Permalink

    Is it the solution or is it mass delusion?

    In the UK QE has expanded the money supply by £375b and the national debt has grown to over one trillion as yearly deficits in excess £100b have been added to demand. In the USA large fiscal deficits and a promise of continuing monthly additions to QE are expanding monetary demand. In Europe the ECB is steward over large fiscal deficits throughout the Eurozone and their version of QE. Even Japan has agreed to add money printing to fiscal deficits that have produced a national debt to GDP ratio in excess of 200%.

    Why is this happening? The reason is that since the credit crunch and financial/economic crisis, which was beginning to take hold in 2006/7, all the major countries in the world have suffered a rise in unemployment and faltering economic growth. Economists have explained how output gaps have grown in these economies and the theoretical solution is to close these gaps by using demand management policies. Despite the fact that there is no evidence of this ever working, politicians have been sold on the idea that they can spend more money and not have to raise taxes to finance it.

    Demand management is talked about across the world as the only solution to a world crisis and if the current expansions in demand are not working then the only solution is that the expansions in monetary demand have not been large enough to reach escape velocity. The new Governor of the Bank of England has been reported as saying that he is willing to see higher inflation for longer to support economic growth. The USA worry about fiscal cliffs and are continually negotiating increases in their, previously agreed, debt ceilings. The UK talks about austerity at the same time as it is likely to add a similar amount to the national debt in 2012/13 as it did in the previous fiscal year. As Oliver Hardy might have said to Stan Laurel “ this is another fine mess we have got ourselves into” So is there a real solution to what is described as mass delusion.

    It is a counter-intuitive argument that needs careful analysis but it suggests that the demand management policies in the world`s major economies have actually caused unemployment to rise and economic growth to stall. Loose monetary policies have caused inflation to be above target and this has the effect of distorting markets and not allowing them to allocate resources efficiently. Since the G20 conference in 2009 major countries agreed to pursue large fiscal deficits to spend their way out of recession. Increased public spending has created more jobs inefficiently in the public sector and, at the same time, crowded out jobs in the private sector, which probably accounts for the net increase in unemployment during this period.

    To deal with this problem requires a change in policy direction that will cause some pain before it starts to improve the current situation. Keynesian demand management policies have not worked and it is necessary to reverse the policies and the thinking. Bank rate needs to rise closer to a market rate and the Central Bank needs to give up interest rate controls and concentrate on the one thing it can control which is the amount of cash in the monetary system. Also it needs to focus on the 2% inflation target, as this is within its remit, and stop talking about manipulating demand to create more jobs and foster growth as it cannot deliver on either of these. Also a law needs to be passed that limit government`s ability to overspend and recognises that Keynesian demand management is just a theory that does not work in practice. It is suggested that government budgets should be balanced over a three-year term without exception.

    The long-term effect will be low and stable inflation, faster economic growth and more employment as was seen in the decade from 1997-2006. The problem is in the short-term as rebalancing the economy will cause job losses in the public sector and that part of the private sector dependent upon government largesse. The recovery will be gradual as more jobs are created in a private sector that begins to trust a government that no only promises sound finance but is legally compelled to achieve it. Overall unemployment will rise before it begins to fall, which is the bad news, but the good news is that economic growth will pick up more quickly.

    So it is important that people understand that government, throughout the world, are the cause of slow growth and high unemployment and that Keynesian demand management policies do not improve the situation, but make it worse. It is necessary to fall off fiscal cliffs, tighten monetary policy and contract the public sector. In the UK austerity should be acted upon, not just talked about. Austerity means cutting government expenditure by more than £100b to balance the budget, not just talking about cutting it by £20b and then not cutting it at all as the siren voices grow louder. So the current policies and underlying economic theory are not the solution and have produced mass delusion.

    John Hearn January 2013
    My learned friend says it all .

    I would like to add that because government spending is falling as a percentage of GDP it doesn’t mean it is falling or that there is no overspend . Unless it falls below the quantity of revenue raised in taxation its a stimulus. The size of this is dependent on where the money is borrowed from as if it is borrowed from the domestic economy it may actually not be a stimulus .Also it is proportionate to the size of the economy.

    Recent and Estimated* US Total Government Spending
    Spending in billions
    http://www.usgovernmentspending.com/us_20th_century_chart.html

  9. uanime5
    Posted February 1, 2013 at 5:19 pm | Permalink

    Given how much Obama boosted spending by to prevent the economy collapsing is it any wonder that the USA is able to reduce spending from a very high level to a high level. This is why the US’s debt is still rising despite cuts.

    I also doubt that the UK would have growth it there were more spending cuts.

    • Edward
      Posted February 3, 2013 at 10:25 am | Permalink

      Uni
      More spending cuts…have I missed something?
      Don’t you really mean…any further slowing down of the planned increase in overall Government spending.

      Government spending is rising.

      • Bazman
        Posted February 3, 2013 at 4:26 pm | Permalink

        On benefits for the unemployed and underemployed and tax cuts for the rich funded by cuts to the poor and tightening up the rest. What in your fantasy world would you call a withdrawal of a percentage of housing benefits for having a spare room or making the unemployed pay council tax Edward? I know it is not a cut, so what is it? An incentive?

        • Edward
          Posted February 4, 2013 at 8:57 am | Permalink

          Baz
          Government spending is rising.
          All that has happened is a small slow down in planned rises.

          Your examples are all to do with political choices.
          More money for the EU and overseas aid and HS2 is deemed possible but the reductions you mention are deemed to be needed.
          Savage cuts and austerity in State spending is a fantasy
          My local council has spare cash for all sorts of pet projects and to pay leaders obscene salaries but is sacking school crossing patrol people and shutting libraries.

  10. boffin
    Posted February 2, 2013 at 11:38 am | Permalink

    One smart move by the US administration was to encourage the construction of new nuclear power plants with the offer of government ‘loan guarantees’ to private sector utilities. This seems an eminently sensible way of propelling major construction activity, leading to cheap clean power for the future, at minimal current cost to the US taxpayer (albeit somewhat upstaged by their present, short-term fracking bonanza).

    Contrast that with the persistent series of crass muddles in the UK by a cadre of politicians of such abysmal technological incompetence as to reward investment in unreliable and uneconomic wind installations, and scare away the investment in nuclear power so vital to our economic future and security, leading to future power costs which are gravely uncompetitive with those of international trade rivals.

    The Chinese were not so stupid ….

  11. Lindsay McDougall
    Posted February 2, 2013 at 10:18 pm | Permalink

    If this is true, the credit belongs to the state administrations, and not the money grabbing, spendthrift Obama administration. So limited is Mr Obama’s ambition that he proposes thal Federal US total federal debt remains at its current relative level (105% of GDP) throughout the remainder of his Presidency. What Mr Obama is saying is: “No matter how much you cut your expenditure (private or state), I will waste the savings.”

  12. Derek Emery
    Posted February 4, 2013 at 9:12 am | Permalink

    Politicians can be 100% guaranteed to put politics before economics and in spite of having hundreds (thousands) of bureaucrats working for them rarely if ever come up with an economic response that matches the problems or even works. Most politicians bureaucrats appear to believe in Keynesian economics regardless of how well it works in practice at solving problems.

    Coalition policies are to increase public borrowing year on year without any end in sight and increase taxation – all to support evermore public increased day by day spending. They are therefore removing money from the private sector (the only sector really capable of generating significant economic growth in the short term) to spend now rather than invest in the future.
    The coalition plans to increase public sector debt to around 100% of GDP by 2015 by more borrowing rather than by any increased income.
    Many economics papers on show that high public sector debt is strongly correlated to low economic growth, and especially strongly where public sector debt approaches 100% of GDP. This is the planned future of the coalition for 2015.
    Guaranteed low growth is our future.

  13. Derek Emery
    Posted February 8, 2013 at 9:02 am | Permalink

    There’s an interesting view on why UK austerity isn’t working at the New Yorker “UK Lesson: Austerity Leads to More Debt” at http://www.newyorker.com/online/blogs/johncassidy/2013/02/uk-shows-how-austerity-policies-lead-to-more-borrowing-and-debt.html?mobify=0
    This quotes a new report by the IFS (institute of Fiscal Studies). This points out the the deficit is no being eliminated and George Osborne will have to borrow around £65 billion next year (4% of GDP). He will have slashed 10% of public spending by 2014.

    He is following IMF advice which says little positive for the IMF understanding of economic situations.

    Reply He has not slashed 10% from public spending. So far public spending is up in real terms under this government

  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
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