2012: The Year Austerity Economics Started To Unravel

In 2012, austerity economics produced a double dip recession with zero growth across the whole year. Mass unemployment continued, real wages shrank and benefits were cut. Crucially, our budget deficit started to rise. Across Europe, economies continued to struggle, with Greece and Spain now looking to be trapped in a depressionary cycle that has produced 50% youth unemployment. Continued austerity measures across Southern Europe will only make these problems worse.

GDP

In 2012 we entered a double dip recession. Q1 and Q2 of 2012/13 saw the economy shrink, and whilst Q3 heralded a return to growth of 0.9%, this seems to have been largely produced by the Olympics, and underlying this growth are concerns about a 2.5% reduction in construction sector, generally seen to be a canary in the mine when it comes to the economy as a whole. Growth for 2012 calender year as a whole was 0%
This effect of austerity had long been predicted by critics of our government’s economic policies, and it is likely that 2013 will see us continue to bump along the bottom, some quarters in growth, some in recession. Overall we’ll see the economy flat or shrinking slightly. Probably we will have two quarters in recession meaning we’ll enter a triple dip recession.

Without growth we cannot hope to close the deficit and start to reduce our national debt. The nature of the capitalist economy is such that if the economy is shrinking, then government income is also shrinking as less tax gets paid. Spending will also rise on benefits and services as people become more reliant on the social security governments provide, as they lose income either through pay cuts/freezes, job losses or their hours being cut.

Employment

At the end of 2012, unemployment was 2.51million – down around 130,000 from the start of the year, although in the West Midlands and Birmingham, unemployment has continued to rise. This seems like a good thing but in what has been called the “jobs enigma” this reduction in unemployment has not been accompanied by GDP growth. There are a number of reasons put forward for this – the huge rise in part time employment, the counting of forced unpaid workfare as a job, thousands going self-employed and pay freezes/reductions across the economy as a whole. Alongside the fall in unemployment has been a rise in long term unemployment – not helped by the £5bn Work Programme which actually reduces peoples chances of finding a job.

Real wages continued to fall over the year, rising by just 2% against inflation of 2.7% in November – lower than much of the year. Those on benefits faced cuts, particularly for disabled people who are being found fit for work by ATOS, and people claiming housing benefit who saw theirs cut by the change to Local Housing Allowance (which caps amounts to the bottom 30% of the market rather than the bottom 50%)

The Deficit

Cumulative Budget Deficit. source

Cumulative Budget Deficit. source

Now bearing in mind that the reason we have austerity, the reason why hundreds of thousands of jobs have already gone in the public sector as billions of pounds of spending is cut – with many more billions still to come, the reason why people are losing services and having benefits cut, is because of the size of the deficit.

The Tories are still touting their dubious “we’ve cut the deficit by a quarter” claim, but in 2012 the deficit – which shrunk during 2011 – started to rise. Again, this is something that has long been predicted by critics of austerity.

Monthly Budget Deficits 2011/12

Monthly Budget Deficits 2011/12 source

From April to November 2012, the deficit was £8.3bn higher than in the same period for 2011. Borrowing in November was £2.1bn higher than in 2011. In fact nearly every month this financial year borrowing has been higher as tax receipts have fallen (because we’re back in recession) and benefit payments have risen (because we’re back in recession).

The Double Dip Recession

So why are we back in recession? Is it really a surprise that cutting government spending reduces GDP? No, this is obvious – the public sector forms part of GDP calculations after all. The question is whether or not the private sector grows enough to fill that space. In 2012, the private sector could not do this – and falling confidence ratings and a shrinking construction sector show that they are not anticipating growth in the near future either.

The core problem here is demand – the private sector does not know whether there will be demand there next month or year for it to expand to meet. High Street Retailers are in huge trouble because people do not have as much money to spend (and are spending it online where they can find lower prices). It is consumer demand that ultimately drives the private sector and without that demand it cannot grow. As real wages are falling and people are forced into part time jobs at lower wages, along with continued uncertainty about the economy and jobs for those still in full time work, it stands to reason that consumer demand will remain stagnant in 2013, and that the private sector will not be able to grow to fill the gaps left by the public sector.

The public sector is more able to take risks and make long term investments than the profit driven private sector. It is this side of the economy which is best placed to make investments at this point in time as well, as the UK government can borrow at 0.5%, far lower than the private sector. By making that investment in infrastructure that will generate an income and profit for the government we can stimulate the economy without committing the government to ongoing expenditure. As the stimulus increases demand and the private sector starts to grow, the government can stop committing to new projects and spending will naturally reduce, which along with the increased tax income and decreased benefit payments resulting from the growth of the private sector, will the deficit reduced and turned into a surplus.
This is the basic outline of keynesian economic practice – something which none of the major parties are likely to do as they all follow the neo-liberal economic ideas of Friedman and Hayek.

The Alternative

Keynesian stimulus to the economy is the economic alternative to neo-liberal austerity. Instead of cutting jobs, we create jobs. Instead of cutting benefits, we maintain or increase them. Instead of freezing wages we give people on low and middle incomes raises. Instead of cutting services, we support them. Most importantly, instead of slashing infrastructure spending we embark on huge projects to build and create those things that we know that we need in order to overcome the twin problems of peak oil and climate change.

By creating a million climate jobs, through a green new deal that would see a huge zero-energy house building program, a massive expansion in renewable energy generation and money to restructure our transport system away from being dependent on oil, we could not only sort out our economic problems but make huge steps towards reducing our dependency on oil and cutting our carbon emissions.

Along the way, we’d create real jobs with proper wages and decent apprenticeships that would reduce youth unemployment and provide training, skills and qualifications whilst paying a living wage and not £2.65/hr.

And of course there are other things we should be doing, like stopping tax avoidance or cutting trident and military spending, which would allow us to borrow less and focus what we do spend on more productive areas.

Does it sound too good to be true? Well have a look at history, at the great depression and how we got out of that. But this time, let’s not make it be a huge world war that provides the large stimulus. Let’s make it something positive – a real move towards a zero-carbon economy.

Update 22/1/2013: December 2012 saw a deficit of £15.4bn, £0.6bn higher than the deficit for December 2011.

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10 Comments

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10 responses to “2012: The Year Austerity Economics Started To Unravel

  1. Pingback: Birmingham Trades Council » 2012: The Year Austerity Economics Started To Unravel

  2. Bob W

    A very useful analyisis, but would it not be better to use the term “alleged” reason of the deficit as the rationale for extreme austerity? That does not necessarily mean becoming a “deficit denier” (although that is an interesting debate to be held elsewhere).
    The Tories always produce some justification for cutting wages and the social wage, no matter how dubious. But in this case they must know that the medicine is not working, so why do they carry on administering it?
    For once, Cameron is being honest when he says ‘we have to compete with China etc’. In other words, they want a very low paid workforce, with next to no rights and with the bare minimum of services, in order for Capitalism UK to boost profits and compete in the global market. Their policies do not need to make sense, as long as they make money for corporations, the banks and of course their friends amongst the 1%, 5% or whatever is the correct number for our rulers.

  3. Very helpful summary
    Graham – Brent Fightback

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