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Simon Wren Lewis Is Confused On Austerity

UK tax to GDP

Or perhaps more accurately, he’s being confusing to us about austerity.

What he wants to tell us is that the Tories are Bastards. Because they’ve cut the amount of our money that government spends on nice things. Plus, obviously, a pony. Except he then tries to use macroeconomic arguments to tell us why this is a bad thing. It’s that mishmash that is misleading:

The IFS estimates that by the end of last year, public service spending excluding health stood at just over 8% of GDP, compared to just over 11% in 2007/08. This is the scale of the austerity we have seen. Day-to-day spending on public services, excluding health, is now three quarters of what it was in 2007. Nothing in the budget will reverse that squeeze to any noticeable extent.

Now, maybe that’s a good or a bad thing. Arguable either way and clearly dependent upon political views about the effectiveness or not of an overweening bureaucracy telling us how to live our lives and determined to confiscate our money in the process*.

But that’s not a macroeconomic argument. This is one:

The first reason is a confusion of language. “Austerity” was first used in 2010 as a way of describing the policies of former chancellor George Osborne. His decision to cut public spending during the worst recession since the second world war flouted basic macroeconomics, the Keynesian principle that in a deep recession governments should spend more, and was opposed by a majority of economists. It delayed the UK’s recovery from the global financial crisis by three years, from 2010 until 2013.

When the economy did finally recover, Osborne continued to cut areas of public spending. Rather than a response to the crash, austerity became just another byword for spending cuts.

Sure, OK, in times of trouble blow out that budget deficit. Which is what was done. And, once it’s past, bring that deficit back under control. Which is what was done. To, at least, some extent. Leading to this:

That is the first confusion caused by the phrase “ending austerity”. The second comes when we look at aggregate numbers. Some will argue the state hasn’t been shrunk at all; total expenditure is projected to be almost 41% of GDP, which is nearly 1% above where it was in the financial year 2007/08. Austerity, they argue, is a myth.

Which it is. We’re back to full employment. In fact, the employment to population ratio is as high as it ever has been – since we started measuring it at least. The unemployment rate is back down to below 1970s numbers. We shouldn’t be having a deficit at all. And yet government is still a higher portion of GDP than it was. That’s simply not austerity. Not in the macroeconomic sense at least.

Which is where Wren Lewis is being confusing. He’s asking us to accept the Keynesian stimulate demand in a crisis argument. OK, we will accept that for the moment. He’s then going on to try to tell us that this is the reason why we shouldn’t have a smaller state when not in a crisis. Hey, maybe we shouldn’t have a smaller state when not in a crisis, argue as you will. But the Keynesian argument about what to do in a crisis isn’t our guide to that at all.

Wren Lewis even tells us that this is all about a confusion of language. The problem being that he perpetuates it.

*It might be possible to discern which side of that argument I favour.

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4 years ago

Thd while thing is a mess. There are areas of government expenditure that do (and should) stay static as GDP rises – the cost of government itself say or the justice system There’s no real reason why many others should keep pace with GDP growth – education, roads, police say. And as unemployment falls, benefit costs should fall. So its surely expected that government expenditure as a percentage of GDP should naturally fall as GDP rises? There must be a limit to what government needs to spend regardless of how much GDP increases. As for Osborne cutting spending, I’m pretty… Read more »

4 years ago

There’s two little mistakes in this claim “public service spending excluding health stood at just over 8% of GDP, compared to just over 11% in 2007/08” which is to assume that public service spending can only be done by government. The experience of countries with easier taxes than ours, is that a great deal of services that benefit the public are done by not-government, and even in the UK not-government provision increased after 2010 based on estimates of charitable giving. The second mistake is that some public service provision doesn’t have a GDP element assigned to it such as doing… Read more »

4 years ago

The other flaw is that public spending in 2008/9 was cleaning up after an explosion. It’s like saying: I spent 50% of my income in 2015 on transport because my car ran over a cliff, it’s *DISGUSTING* that I’m not spending 50% of my income on travel this year.

The “excluding health” looks right suspicious as well.

Bloke on M4
Bloke on M4
4 years ago

The big thing about “austerity” was forcing the sort of savings that were long overdue, and scrapping stuff that really isn’t the job of government. The key thing about government is that it’s always going to spend what you give them. And not just in an “or we don’t get the budget next year”, but that they won’t bother seizing opportunities for change unless forced to do so. I did some work for a local authority and they were functioning more like a business when I was there, and part of that is they looked harder for savings. They were… Read more »

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