Is Austerity Solving Our Economic Problems?

6 months ago, I wrote this post, asking whether austerity measures can solve the deficit problem, and I thought it was time to have a look at what I said in that post, and what has happened since then.

In the post, I argue that austerity measures prevent the economy from growing, or even cause it to go into recession, and that the lack of growth means that it will not be possible to remove the deficit, and trying to do so would not just fail, but hurt many people along the way.

The economic data for the UK has not been encouraging. Unemployment has risen to 2.68 million people, with youth unemployment comfortably over 1 million. In addition to this, hundreds of thousands of people have taken part time jobs because they have been unable to find full time work.
In Birmingham, the rates are higher than nationally, with 4 of the highest unemployment rates of parliamentary constituencies – Ladywood (highest in the UK – 20%), Hodge Hill (2nd), Erdington (9th) and Hall Green (11th)

Recently, Jaguar had 20,000 applications for 1,000 positions, and a new hotel had 1,500 applications for 100 positions.

GDP has not been good either, with the UK contracting by 0.2% in Q4 of 2011, and period that will have been boosted by Christmas sales. If, as is expected, we have a further contraction in the first quarter of 2012, then we will be officially back in recession – and since we never grew back to the point we were before 2008, this will be a “double-dip recession”.

Looking to Europe we can see similar things happening. In Ireland, the deficit has actually grown, from €19bn to €25bn as austerity measures kill the economy. In Greece, austerity measures have also presided over a rising deficit, with a 15% increase from Sept. 2010 to Sept. 2011. (This has since been reduced by writing off large amounts of debt).

Across southern Europe, we see rising unemployment, and especially youth unemployment. Spain now has a staggering 50% of 16-24 year olds out of work, with Portugal, Italy and Greece not far behind. Indeed only 3 EU countries (Germany, Austria and Netherlands) have youth unemployment rates under 10%.
In November, the UK had a youth unemployment rate of 20.4%, and youth unemployment has risen since then. Additionally, around 1/3rd of people in Birmingham are under 25 – we are the youngest city in the UK – which means that we are feeling the impact of youth unemployment more heavily than elsewhere.

So unemployment is up, growth is down and inflation is still hovering around 4%-5% (whilst average wages increased at only 1.9% in 2011 – a real terms pay cut for most of us.. not so for the FTSE 100 directors who saw a pay increase of 49%). All of this is bad of course, and no politician will deny that. But, they say, it is the price we have to pay to clear our deficit. We must get through this pain, all in it together (except, of course, the wealthiest people who are seeing their wealth increase at staggering rates).
So what has happened to our deficit? We have seen that Ireland and Greece have increased their deficit whilst taking austerity measures, how is the UK doing?

In August 2011, we set a record for the biggest August deficit on record, and across the year things are not much better. We have managed to reduce our deficit, but according to the Autumn Statement (PDF – table on p81) we were on course to reduce our deficit by just £4.7bn in 2011. This is in contrast to the claims of reducing the deficit by £20bn each year made in 2010, when the coalition set out their cuts agenda.

With the economy shrinking in the final quarter of 2011, it seems likely that the forecast done for the budget statement will prove to be wrong, and unless the economy picks up in 2012, we are likely to see an even smaller reduction, or even a growing deficit as in Ireland and Greece, despite huge cuts in spending.

Update, May 3rd 2012: The CBI have predicted that the budget deficit for 2012-13 will be around £128bn – £8bn more than the £120bn George Osborne claimed in the budget, and £2bn more than the £126bn deficit for 2011-12. If this prediction is right, then austerity will have increased the deficit.

As explained in the earlier post, cutting spending at a time when the economy is not doing well only serves to reduce demand in the economy, putting people out of work which in turn causes tax receipts to fall and government spending to rise. Indeed, every 100,000 people who become unemployed costs the government £500 million.

To reduce the deficit we need an alternative to austerity. We need to invest in our economy to create jobs and growth, and we can do this in ways that provide other bonuses, such as investing in new, environmentally efficient social housing, that will both act to reduce the housing benefit bill by bringing rental costs down and also provide high quality affordable housing that is suitable for a sustainable future.

There are many ways in which we could invest in our economy, some of which are outlined in this post about keynesian stimulus. Future posts will explore the possibility of a “Green New Deal” and of other infrastructure projects.
Other alternatives to austerity can be found in our alternatives series, or on the False Economy website.

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