Tag Archives: cuts are the wrong cure

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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Alternatives to the Cuts: Will Austerity Solve the Deficit Problem?

This post is going to explore what effect the austerity agenda being pursued by the government is likely to have on the levels of deficit and debt for the UK government.

This is part of the alternatives to the cuts series, which will seek to explore and explain why the cuts won’t work, and what the alternatives are.  You can  see an archive of posts in the series here.

The problem, so we are told, is that the government is spending too much money.  We are borrowing in an unsustainable fashion and our deficit – the amount of money we need to borrow each month or year – is spiralling out of control.  This means that our national debt – the amount of money that we owe in total – is rising to a point where we might face a sovereign debt crisis.

I’m going to explore how true that is in another post, but for now let us accept that this is more or less true.  Let us say that we do need to reduce the deficit, and in a serious manner, in order to avoid the problems that we can see happening in Greece, Portugal, Spain, Italy and Ireland whose credit ratings are being downgraded, and their governments are being forced to borrow even more money – or possibly default on debts.

The question we must ask is will cutting spending solve this problem, and in this post I am going to outline some of the reasons why it won’t.  Don’t just take my word for it, have a look at what some of the experts have to say.

First off, some graphs:

This graph shows the level of debt as a % of GDP (the inset shows from the start of the 20th century).  You can see that right up until the point that Northern Rock collapsed, the debt was at a lower level than for much of the time under Thatcher.


This graph shows changes in the deficit level.  One thing that is clear from this is that recessions (ie: the recession in the early 1990s) increase the size of the deficit, whilst in periods of growth (such as the late 80s, or late 90s/early 00s) act to reduce the deficit.

So we can say that if we want to reduce the deficit, the last thing we want is a recession – or at least, a recession would be unhelpful in our pursuit of deficit reduction. Conversely we can say that strong growth – in particular the kind of growth which comes from increases in employment – would be helpful.

So what’s been happening to GDP recently?

This graph shows changes in GDP – the bars are for that quarter, whilst the line shows an average of the previous year.  You can see the recession following the banking collapse with a fall of nearly 6% in GDP between 2008 & 2009.  Then there is a recovery, towards the end of 2009.  It should be noted however that this growth did not produce a significant fall in unemployment nationally (although interestingly, and something I didn’t know until I saw that graph, the West Midlands did see a fall in unemployment in that period).

Then something happens around Q2 of 2010.. sometime between March and April the GDP growth peaks (can you think of any significant event happening between March and April 2010?), and although there is GDP growth in Q3 2010, it is less than the previous quarter.  OK, seasonal variation, nothing significant it just happens to be less.. but then in Q4 2010, there is actual shrinking of the economy of -0.5%.  Osborne blamed the snow, but the following quarter saw growth of just 0.5%, which means that the bounceback effect of deferred spending from the previous quarter was not enough to produce growth over the 6 months following the budget review which revealed the true scale of cuts that the ConDems are planning.  Technically not a recession, as that requires two consecutive quarters of contraction in the economy, rather than an average over 6 months.

The next quarter’s initial figures will be out in the next week or so, but indications put it at 0% to 0.3%, hardly the kind of levels of growth required to put the economy back on track, and produce the growth and jobs that would provide an increase in taxation revenues, and a reduction in benefit payments for the government, and which would naturally reduce the level of deficit until – just like after the recession in the 90s – we reach a point where we are running at a surplus and paying off that debt.

At some point I’ll write a post that explores more theoretically why cutting spending at this point in the economic cycle, and in the circumstances the world, and particularly some of our close neighbours, find themselves in will not produce growth, as Paul Krugmann (Nobel Prize winner for Economics, 2008) argues.

I will highly recommend Krugmann’s blog – although focussed on the USA, he provides an important source of information – sometimes his posts are very technical, but often they are highly accessible and useful in giving yourself the information you need to win arguments about spending cuts.

So we can see that the economy has gone from moderate growth to flatlining between Q4 2010 and (presumably) Q2 2011 – in the 9 months since the ConDems budget review revealed the scale of cuts to come.  In that time we have also had a rise in VAT, and council budgets around the country revealing the job losses and pay cuts to come in local government.  People around the UK are very aware that if they, or someone they know, works in the public sector they might well lose their job, or face a pay cut.  Because of this, we have cut back our spending.  This decreases demand, and in doing so puts the private sector at risk.  Recently we have seen a slew of high street names entering administration, and construction industry growth slowing as well – often an early indicator of trouble to come.

So far from growing to fill the space that the public sector has left (the idea being that the public sector is “crowding out” the private sector), the private sector may well shrink as well.  This could lead to another recession (the “double-dip recession”), and another recession will mean that the deficit will rise as tax income falls and welfare payments rise.  Whether spending cuts can keep pace with those factors is not the question, the question is whether there is a solution (or group of solutions) that can reduce the deficit without producing recession – these are the alternatives to cuts, and I will be producing posts detailing each of them.

This strand of discussion also links heavily to one of the alternatives that will be discussed in a future post – policies for growth.

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The Alternatives to Cuts .. part 1 in an occasional series

There is no alternative.

The rallying cry of the ConDems and their supporters.  No alternative to huge cuts in public spending in order to deal with the deficit that Labour left us, and the national debt, which is unsustainably large.  If we don’t make cuts then the debt will destroy our ability to spend any money at all as interest payments eat up available money.

Sometimes people talk about not wanting to pass the burden of debt onto their children.. some talk about how if a household was in debt and spending more than they earnt you’d have to cut spending and think this analogy can be simply placed onto a national economy (which it can’t – but taking that analogy apart will wait for another post).

The truth is that there are alternatives to cuts, and in fact the austerity measures being brought in are just as likely to ruin our economy and in fact end up increasing the deficit as they are to reduce them.  This is the first in an occasional series of posts outlining the reasons why austerity won’t work, and what the alternatives are to them.

I am not an economics professor, or a tax accountant.  I will be relying heavily on other people to provide the substance to my arguments.  Some of the names that you should make yourself familiar with are

Joseph Stiglitz – former chief of the world bank, Nobel prize winner for economics 2001 Twitter Feed

Paul Krugmann – Nobel prize winner for economics 2008 – New York Times blog Twitter Feed

Christopher Pissarides – Nobel prize winner for economics 2010

More experts speaking against austerity can be found on the False Economy website.  Whenever people tell you austerity is the answer to the problem, send them to read what these experts have to say.  Ask them to find examples of austerity actually working (they’ll come back with Canada in the ’90s – briefly, Canada did reduce its national debt, but its economy flatlined during a period of explosive growth around the world, especially in its main trading partner (USA) and lots of extra revenue came in from new oil finds.. a post with more detail might come on this later.. essentially austerity produced a flat economy at a time when it should have been growing, and that growth would have reduced the national debt anyway).

But it’s not enough to present people with an argument that says austerity probably won’t work if you can’t also provide a different solution.  Thankfully there are other solutions to the issue of our deficit.  Detail on the variety of ways  in which we can proceed to provide a total solution are on the False Economy website.  These include policies for economic growth (especially investment in green manufacturing); closing the £120bn tax gap; a robin hood tax on the banks that caused the crisis and taxing the rich.

The most important of these is investing in the economy, producing jobs and growth to stimulate demand – demand which then helps the private sector to grow.  At this point in time, the contractionary policies of the government are, surprisingly, causing the economy to contract.  People are losing jobs or having pay cuts – or are concerned, quite rightly, that they will be losing their jobs or pay in the near future.  Because of that they are not spending money, and because they are not spending money we are seeing the private sector get into trouble – high street shops are closing putting 10,000 jobs at risk; the construction industry shrank by over 3% in the first quarter (Q1) of 2011 and the early indicators for growth in Q2 2011 are that it will be between 0% and 0.3%.

This is a recipe for economic disaster, not economic growth.  We must take the argument to them.  This is an argument we can win, and to help us win it I will be writing articles on some of the individual parts of it. In the meantime, watch this video from (yes, you guessed it) False Economy:

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