Austerity Vs Growth

Wookster

I've been getting quite irritated by this whole austerity vs growth argument. What people really mean is more state spending.

Terry Smith has recently written an article for his blog:

I have appeared recently on Newsnight (23 minutes in), ITN News and BBC News talking about the debate over austerity v growth.
I also appeared on Robert Peston’s BBC2 programme about the Eurozone crisis - The Great Euro Crash .
These appearances were prompted by the Eurozone crisis coming back into focus, and in particular by a period of a week in which the Dutch government fell; elections in Greece failed to produce a government, and in particular failed to produce a consensus which supported the austerity measures which Greece had agreed to as part of its last bailout deal; and the socialist candidate Francois Hollande defeated the incumbent Nicholas Sarkozy to become President of France. Clearly the electorates are rejecting austerity. It has now led David Cameron to start making supportive noises about Monsieur Hollande’s call for policies to support growth. It seems strange to scramble to align oneself with a soundbite. But then I’m not a politician.
The appearances were also a result of the publication of the latest piece of research by my colleague Dr Tim Morgan – Blowing the Whistle on UK Austerity .
Tim’s research explodes the myth that the UK economy is struggling under the impact of government spending cuts. Government spending was cut by just 1.5% in 2011-12 and is only planned to fall by 5-6% by 2016-17 (so far away, who cares?). It is still over £20bn higher than government expenditure in 2008-09 under Labour. More worryingly, it is 50% higher in real terms than it was 10 years ago. As Tim succinctly puts it: what is it that the government wasn’t supplying ten years ago that we now cannot live without? The answer of course is nothing. Expenditure can be radically reduced and needs to be if there is to be any chance of closing the deficit which is currently running at over £120bn per annum and adding to the national debt which is already too high.
Such a miniscule cut did not send the UK economy back into recession-it never exited in reality (see below about the size of the stimulus which has been applied just to get it to stand still).
My stance is clear and it has been so since the onset of the financial crisis and the Eurozone crisis:
1. The debate between those who propose policies designed to promote growth and those who see the need for austerity is a sterile one for a number of reasons.

The simplest reason is that we are going to get austerity whatever people want. There is simply no source of additional money to spend to stimulate growth. The bond markets have had enough of governments who continually run unsustainable deficits. You cannot borrow your way out of a debt crisis.

Additional deficit spending funded by increased borrowing would not produce the desired result even if it were possible. So far the UK economy has been the recipient of £500bn of deficit spending, £325bn of Quantitative Easing and interest rates have been at a 300 year low for over three years. These so-called Keynesian measures (I say “so-called” because most of their proponents seem to me to have about as much grasp of Keynesian economics as they do the topography of the far side of the Moon) have not managed to get the economy growing so far, and they will not. The velocity of circulation of money has slowed-people want to pay down debt where they can. The government is also an incredibly inefficient spender (unsurprisingly as it’s not their money)-in the years prior to the recession it borrowed £2.18 for every £1 of growth. As Einstein said, to keep repeating the same actions whilst expecting a different outcome is a definition of insanity.

2. The only way to generate growth is to cut the size of public spending sufficiently to allow for tax cuts. Individuals and companies are much more efficient at spending the money they earn than the government is on their behalf, so better to leave more of it in their hands.

Yes, I do have a plan for exactly where to make the cuts.

3. With regard to the Eurozone I first predicted that Greece would leave in April 2010. I have not changed my mind.

There have been no fundamental solutions applied to correct the problems of the Eurozone. You cannot solve a problem of solvency and lack of competitiveness with liquidity and rhetoric. If you could, it would have been solved long ago.

When Greece leaves, the crisis will roll on into Portugal (I know it’s a small country but everyone seems to have forgotten them) followed by Spain, Italy, Ireland and ultimately France. Yes, the horrible truth is that financially France is a peripheral country, one of the PIIGS.

Which is supremely excellent.

chucky

Most people on here just don't understand that the economy is not like a household budget where you can cut expenditure to make savings.

It's a little bit more complex, you do need investment and more importantly growth.

chewmylegoff

What is his plan for where to make the cuts, or does he just say he has a plan but not what it is?

DpchMd

Thanks, I really enjoyed reading that.

Wookster

chewmylegoff wrote: »

What is his plan for where to make the cuts, or does he just say he has a plan but not what it is?

I think that's in one of his previous blogs and it boils down to the NHS & the Welfare state IIRC. He thinks that anything else is 'tinkering at the edges.'

crash123

Wookster wrote: »

I think that's in one of his previous blogs and it boils down to the NHS & the Welfare state IIRC. He thinks that anything else is 'tinkering at the edges.'

I think the NHS is great but unaffordable.We are living longer etc so can we really afford it in its current state.
The welfare state don`t know much about as only claimed when unemployed about 20+ years ago but I would get rid of child benefit as I think it is a choice that you make if you want children. I am sure others have things that they would do.

chewmylegoff

chucky wrote: »

Most people on here just don't understand that the economy is not like a household budget where you can cut expenditure to make savings.

It's a little bit more complex, you do need investment and more importantly growth.

Yes but as we all know public spending does not necessarily amount to investment, and the vast majority of uk govt public spending could not reasonably described as investment.

HAMISH_MCTAVISH

Wookster wrote: »

I think that's in one of his previous blogs and it boils down to the NHS & the Welfare state IIRC. He thinks that anything else is 'tinkering at the edges.'

Sure, I can agree with that in theory.

You could make massive cuts to the NHS and Welfare State, reduce taxes to stimulate economic growth, and that would indeed get us back to growth.

Politically impossible of course, so a complete waste of time even discussing it.

Oh, and the article in the OP is riddled with errors, not least of which is this one.

There is simply no source of additional money to spend to stimulate growth. The bond markets have had enough of governments who continually run unsustainable deficits. You cannot borrow your way out of a debt crisis.

Whereas in reality, perhaps the biggest bond vigilante of them all, Bill Gross at Pimco, warned against continuing austerity in it's current form over 6 months ago, and called on Osborne to make changes which would stimulate growth instead.

The alternative he said, would be to risk recession.

Turns out he was right.

(Reuters) - The austerity measures implemented by Chancellor George Osborne risk pushing the UK economy into recession, Bill Gross, the manager of PIMCO, said in an interview with the Times.

Gross, who manages the world's biggest bond fund, told the newspaper that a "mid-course correction" of the fiscal plans would lift the economy and should not damage the country's standing with bond investors.

"The economy in the UK is worse off than it was when the plan was developed, so there should be at a minimum fine-tuning and perhaps re-routing of the plan," he was quoted as saying.

Gross said a similar argument applied to other leading economies, including in the euro zone and the United States, which he said faced a mounting crisis.

"The UK is actually in the best position of all to make a mid-course correction," Gross said.

He told the newspaper that he did not want a 180-degree U-turn but that for PIMCO "a mild re-adjustment that might keep the economy out of recession would be viewed very favourably"

Graham_Devon

He's wrong on the part that the government provide nothing more now. They do. It's not a "new" thing, if that's what he is suggesting, i..e suddenly the government provide free seats on planes to 54 year olds.

But, we do have more people here, through immigration. We have higher security through terrorism. We have a war. We have a HUGE benefit culture now compared to just 10 years ago.

So it may not neccesarily be new spending, but certainly the spending has increased in a lot of areas. Not to mention the stimulus spending.

Theres one thing I do have to wonder though. Anyone watched that "The 70s" series on the BBC? I'm watching it currently through Iplayer, and to be honest, everything then, is pretty much the same as it is now.

The start of the 70's saw people keeping up with the neighbours. It was then houses which deregulation meant people could buy easier. Then it was credit cards. The idea was have it today, pay tommorow. Then it was increased credit on the back of securities such as houses.

Then....suddenly, the merry-go-round stopped. The oil crisis, the miners strike, food prices, the 3 day week. All of a sudden the plastic cash was out and had to be paid back, meaning families had to tighten their belts, the government had to tighten it's belt. For a few years, standard of living dropped. But they got on with it and came out the other end.

By the end of the 90's, it seems all this was forgotten. Back to carryiong out the same process all over again, but this time, credit went further. You didn't have to stop when you max'ed out the credit card. You could MEW. You could consolidate loans and get more cards. You could borrow 125% of the house price.

Then the merry-go-round stopped.

We've been here. We've learnt these lessons before. Sure, the problem is bigger this time, solely because the lending was crazier than before, spread across several countries.

We know the solution. So why pretend we can borrow to sort out our borrowing problems today? Why insist on dragging this all out over several years under the pretence that its somewhat different this time. The only difference IMO is times have changed. Not the problem.

The_White_Horse

they need to sack at least 20% of public sector and then reduce the remaining workers salaries by 30%. I was speaking to someone yesterday who told me his wife is a physio in the nhs - on 50k!! absolute insanity. and think of the final salary pension liability. it is a disgrace. the public sector needs massive cuts. if they want to strike, fine. i am willing to fight them.

grizzly1911

Never mind we have the Olympics and a young guy has just made himself $19BN out of nothing in 8 years with nothing,

Listening to Becks, BoJo and Cleggy yesterday made me think there must be a a parallell Britain out there that they have clambered aboard.