Yesterday I was asked to debate the so called “austerity” policy for the UK economy. Lord Desai and I defended the policy of reducing the public deficit as part of a recovery programme for the UK economy. Lord Skidelsky and William Keegan argued that the “austerity” policy had done damage to the UK economy.
In the initial poll of the OMFIF audience a large majority sided with the critics of deficit reduction. After the debate the gap had narrowed, though there was still a majority against the policy.
It was one of those unsatisfactory modern UK debates because the other side of the argument seemed completely unaware of the numbers. Any examination shows that public spending went up throughout the last four years, more quickly at first, then at a slowing rate subsquently. This is at variance with the thesis that higher deficits produce better growth, as there was no growth for the first couple of years of larger deficits and faster growth in spending, followed by gr0wth in the later period when the deficit was down a bit and spending under a bit better control. The other side argued that there had been cuts that were too far and too fast in the early years of the Coalition leading to no growth, followed by some relaxation in public spending subsequently, along with monetary stimulus, which led to the expansion we now enjoy.
I explained that no-one in Parliament is in favour of austerity in the sense that no-one wants a squeeze on people’s living standards and real incomes. The political debate is about how government can best assist the growth of living standards. Average living standards contracted very sharply between 2008 and 2010 during the Great Recession, and fell further during the early years of the Coalition. It looks as if they are now rising from the lower base.
More importantly, the economy has generated a large number of new jobs in the private sector in the last four years. The best way for an individual or family to experience an improvement in living standards is to move from unemployment into work, or to move to a better paid job. The large number of new full time jobs that have come available, and the sharp upturn in self employment, must mean there are now many who through their own efforts have improved their net income. The removal of Income tax from many more lower paid people has also helped.
I took the meeting through the twists and turns of monetary policy and the problems created by slimming down major commercial banks, as readers of this blog will recall. Monetary policy has had a larger impact on the economy 2005-14 than public spending or the deficit, as the numbers in Quantitative Easing, the expansion and then contraction of bank balance sheets and the changes in overall credit are considerably larger than increments to public spending.
The two economists were reluctant to accept that a country does have to avoid excessive debts and deficits, just like an individual or company. They seemed to think there is a free money tree in every state’s back garden which just has to be harvested to make us all rich. They did not accept that if you print and borrow too much one day you run out of other people’s money to spend.