Since 2008 the US Federal deficit has fallen rapidly, from 10% of GDP to around 4% this year, from a peak of $1413 billion to an estimated $607 billion for the year to end September 2013. That’s a big cut in cash terms, a big cut in real terms, and a big cut as a proportion of GDP.
At the same time the US economy has recovered well from the big recession in 2008-9, and is now producing more than at its pre recession peak. According to austerity theorists, this should not have happened. Whilst some of the deficit reduction comes from rising tax revenues as a result of growth, some also has come from actual cuts in overall public spending. This contrasts with the UK where public spending has continued to rise overall. This year US federal spending is down by 2.9% in cash terms, rather more in the much favoured real terms.
UK total public spending is up by 7% this year (2013-14), (Red Book 2013 p 103) though last year’s figures are a bit distorted. It is up 4% compared to 2011-12. Borrowing is down on the peak levels of 2008-9 but still a higher proportion of GDP than in the USA.
Those who have argued that you can cut too far and too fast should study the US example. It shows that you can stimulate more private sector led growth if you cut spending and the state deficit fairly rapidly, whilst maintaining a loose monetary policy. The US private sector has performed extremely well, to offset the substantial cuts in public spending.
In the UK where the public spending growth rate has been brought down and the amount of extra borrowing cut, there has also been a recovery. It is picking up speed now, though during the frst two years of the Coalition when public spending was still growing more quickly there was little overall economic growth. The UK is showing as with the USA that starting to tackle the deficit, far from impeding recovery, assists it.
It was interesting this week to see Rachel Reeves, one of Labour’s Treasury team, given the job of cancelling Labour’s policy of a VAT cut to give the economy an immediate boost. Apparently the UK economy is now growing fast enough for Labour to no longer think it needs a one off tax cut with extra borrowing. Labour also needs to ask themselves why Mr Obama’s cuts strategy, cutting spending and borrowing more drastically than the UK, has delivered faster growth sooner. Some honesty on what the figures tell us would be a good starting point.