All the so called neo-Kenysians are out and about telling us that the US is recovering well owing to further fiscal stimulus, whilst the UK is said to be faltering thanks to a government “cutting too far and too fast”. It is time to debunk this nonsense.
Let me start by saying I think Keynes was a great economist. His insights into the creation of money, inflation, and growth are important. All mainstream political parties are heir to his traditions in several respects. All agree that the state should borrow to offset a fall in demand in a recession. All agree that there needs to be controls over money and credit creation with a monopoly money system organised by the state. The Central Bank has to decide on overall levels of money and credit. They do not, however, tend to follow his precepts in a boom, when they ought to be asking the state to control spending and repay debt.
The figures for the deficits in the USA and the UK show that the US has a smaller fiscal deficit, and it is falling more quickly. The US public sector borrowed 8.7% of GDP in 2011, and plans to borrow 8.3% in 2012 and 5.5% in 2013. In contrast the UK public sector borrowed 9.5% of GDP in 2012-11, 8.5% in 2011-12 and plans to borrow 7.7% in 2012-13. The UK deficit is larger each year, and falling less.
Whilst the Federal government has not been keen to cut spending in an election year, states’ spending has been cut in many locations to bring the overall deficit down. Total US public spending rose by 2.2% in 2011, is forecast to rise by 3.8% in 2012 and by 2% in 2013. UK current public spending rose by 4.8% in 2010-11, by 2.9% in 2011-12 and is forecast to rise by 2.6% in 2012-13.UK capital spending is falling slightly over the same time period. The main cuts in capital spending occurred in the revised Labour plans before the General Election. The UK public sector accounts for 45% of GDP. The US public sector accounts for 40% of GDP.
Of course it is true that UK inflation has been higher. However, in the public sector with a wage freeze it should be considerably lower, given the high proportion of wage expenditure in the total. It is also true that as an economy grows the deficit should come down as revenues pick up. If the contrasting performances of the two economies proves anything, it appears to prove that an economy with a higher proportion of public spending in total GDP with a higher level of public borrowing performs worse than an economy with lower figures.