Some Thoughts on Austerity
Yesterday I noted that the austerity measures in Greece, Portugal and Ireland have had devastating effects on those economies. In each case they reduced growth, pushed up unemployment and ultimately increased the debt burden on the afflicted economy leading to a loss of market confidence.
Given these facts I questioned why Osborne thought he could claim Portugal as a vindication of his policies rather than a star warning.
Ireland adopted austerity measures in 2008 and was eventually forced into seeking a bailout last year. In the past year, since tougher measures were adopted, Greek growth has collapsed, unemployment has soared and the interest rate on government bonds is consequently much higher.
Tough austerity is a self-defeating strategy.
Several commentators have been quick to point out that Portugal, Ireland and Greece had ‘no choice’ but to adopt these policies. Now whilst there is always a choice*, I fully accept that in each of those cases membership of the Euro, the maturity profile of outstanding debt that needed to be refinanced and loss of confidence from the bond markets forced the government’s hand.
But this doesn’t change the fact that austerity isn’t work and is unlikely to work. As today’s Economist says of Greece:
A year ago the plan forecast that GDP would shrink by 4% in 2010 and 2.5% in 2011. Instead it fell by 4.5% last year and IOBE predicts it will decline by 3.2% in 2011. The unemployment rate has risen from 9% in mid-2009 to 14.2% in the last quarter of 2010, and is expected to average 15.5% this year…
The economy is stuck in a vicious circle. If it stays weak, that will undermine the government’s ability to achieve additional fiscal retrenchment; that in turn will cause further loss of confidence on the part of the markets, which will continue to lock the banks out of funding sources.
The key difference between Britain and the Euro-Periphery is that Britain certainly does have a clear choice – we have the longest debt maturity in the developed world, the markets are prepared to lend to us at near record lows (and have been for over two years – not just since the emergency budget), our debt/GDP ratio is comparatively low. Whatever the scare-mongers say, Britain was nowhere near the brink of bankruptcy.
It may surprise some readers to learn that I can be something of a ‘fiscal hawk’ at times. I’ve argued here before that Labour shouldn’t have been running a structural deficit in 2003-2007 (although not because of ‘over-spending’, in late 2007 (i.e. pre-crash) I managed to annoy some left of centre friends by arguing that closing the US federal deficit was a more important priority in the short run that healthcare reform and I’ve said many times before that I don’t believe fiscal policy holds all the answers to our current problems.
When the economy is performing well and unemployment has been brought down, I’ll fully support tax rises and spending cuts to close whatever bit of the deficit remains.
Now isn’t that time.**
The important priorities now are to kick-start growth, to cut unemployment, to grow real wages and to increase investment. Get that right and the deficit will fall, get it wrong and we risk finding ourselves is a much, much worse position.
I see no evidence that austerity can deliver growth, employment, higher real wages and higher investment. It’s likely to do the opposite. Which makes it all the more strange that the UK has chosen to embark on this dangerous course.
*In all three cases I strongly suspect some form of debt restructuring would have been a better choice and is almost bound to happen anyway.