Last week’s budget was controversial. Opponents of the government’s policies took to the streets of London. Defenders took to the more comfortable surroundings of the television studios. Even those in business whom the chancellor said he was trying help have been clapping with one hand: on more detailed reflection, the Federation of Small Business believes the budget has done little or nothing to help smaller firms.
Now, those with access to parliament’s own video channel will be able to watch the chancellor defend his thinking in front of the Treasury committee – he has been summoned to give evidence this morning (Tuesday).
The media have been full of analysis about the government’s decision to push forward with an austerity plan. There is one piece of analysis, however, which appears to carry more weight, in part because it wasn’t written with a British audience in mind and in part because it uses the European experience as a warning to American legislators.
It was written by the American economist, Paul Krugman, Professor of Economics and International Affairs at Princeton University and an honorary professor at the London School of Economics. He has also won the Nobel Prize for Economics.
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In an article for the New York Times, Krugman questioned the austerity packages either being pushed through or imposed on many European countries. He called his piece “The Austerity Delusion”, pointing out that Portugal’s government had just fallen in a dispute over its austerity proposals. In Ireland, bond yields had topped 10 per cent for the first time. And he specifically mentioned the UK, with the government marking its economic forecast down and its deficit forecast up. What, Krugman asked, do these events have in common? “They’re all evidence that slashing spending in the face of high unemployment is a mistake. Austerity advocates predicted that spending cuts would bring quick dividends in the form of rising confidence, and that there would be few, if any, adverse effects on growth and jobs; but they were wrong.” The article was written for an American audience and, in particular, for those policy makers working within the Beltway in Washington DC. Krugman's intention was to warn them about the perils of following the same path. As he puts it: “these days you’re not considered serious in Washington unless you profess allegiance to the same doctrine that’s failing so dismally in Europe.” Krugman pointed out that a change of thinking had come about quite quickly. Just two years ago, at the height of the financial crisis, governments around the world had taken a very different view when faced with soaring unemployment and large budget deficits. Instead of imposing large and dramatic cuts in public spending and reducing their deficits quickly, they agreed on a plan with an immediate focus on creating jobs and the longer term strategy of deficit reduction. At the time, they agreed that tax increases and cuts in government spending would depress their economies even further. In Krugman’s words, “cutting spending in a deeply depressed economy is largely self-defeating even in purely fiscal terms: any savings achieved at the front end are partly offset by lower revenue, as the economy shrinks. “So jobs now, deficits later was and is the right strategy. Unfortunately, it’s a strategy that has been abandoned in the face of phantom risks and delusional hopes. On one side, we’re constantly told that if we don’t slash spending immediately we’ll end up just like Greece, unable to borrow except at exorbitant interest rates. On the other, we’re told not to worry about the impact of spending cuts on jobs because fiscal austerity will actually create jobs by raising confidence.” Krugman argues that hawks in the US have been in the ascendant. In their worst projections, the US could end up with major problems if action to reduce the deficit isn’t taken now. In Krugman’s view, that’s only a serious scenario if “investors decide that we’re a banana republic whose politicians can’t or won’t come to grips with long-term problems … but that’s not a prospect that hinges, one way or another, on whether we punish ourselves with short-run spending cuts. Just ask the Irish, whose government – having taken on an unsustainable debt burden by trying to bail out runaway banks – tried to reassure markets by imposing savage austerity measures on ordinary citizens. The same people urging spending cuts on America cheered. “Ireland offers an admirable lesson in fiscal responsibility,” declared Alan Reynolds of the Cato Institute, who said that the spending cuts had removed fears over Irish solvency and predicted rapid economic recovery.” And then Krugman turns his attention to the UK to analyse the impact of the austerity policies being put in place here. “Like America,” he writes, “Britain is still perceived as solvent by financial markets, giving it room to pursue a strategy of jobs first, deficits later. But the government of Prime Minister David Cameron chose instead to move to immediate, unforced austerity, in the belief that private spending would more than make up for the government’s pullback. As I like to put it, the Cameron plan was based on belief that the confidence fairy would make everything all right. “But she hasn’t: British growth has stalled, and the government has marked up its deficit projections as a result.” In other words, a Nobel Prize-winning economist believes the UK has taken a wrong turn, one that could have implications for our long-term future. Turning his aim back at the US, Krugman suggests that “a serious fiscal plan for America would address the long-run drivers of spending, above all health care costs, and it would almost certainly include some kind of tax increase.” But he claims there is no serious fiscal plan. In particular, politicians of both main parties there seem to have accepted that “nobody should ever pay higher taxes. Instead, all the talk is about short-run spending cuts. “In short,” Krugman concludes, “we have a political climate in which self-styled deficit hawks want to punish the unemployed even as they oppose any action that would address our long-run budget problems. And here’s what we know from experience abroad: The confidence fairy won’t save us from the consequences of our folly.”Donate to us: support independent, intelligent, in-depth Scottish journalism from just 3p a day
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