TINA is back. David Cameron has reprised Mrs Thatcher’s proclamation that ‘there is no alternative’ to justify the current policy of austerity. Politicians frequently misrepresent economic reality to argue that there are few, if any, alternatives in the conduct of economic policy. George Osborne has stated that there can be no plan B for economic policy. And even when Vince Cable comes up with a Plan B he has to portray it as a Plan A+.
According to Cameron: ‘there’s no magic money tree to fund this ever more wishful borrowing and spending’. What are the economic realities of austerity?
Myths of Austerity: public debt is historically high
It is frequently cited that the UK is suffering a historical high level of public sector debt. It is not as the chart shows. Public debt was much higher for most of the twentieth century – it is higher during periods of war and when the economy is suffering from slow growth (as now). Some austerians argue that if public debt reached 90% of GDP then growth will suffer. This is entirely misleading: it is based on a simple correlation; and the causality runs from slow growth to rising debt and not the other way round.
2. Myths of Austerity: public deficits are too high
There is no ideal amount for the level of public deficits. They tend to rise in periods of recession and fall in periods of growth. The main problem for the UK deficit is a lack of growth which means lower tax revenues and higher benefits payments. Over a long-period, it makes sense for Government to balance its current spending with tax revenue but this does not apply to capital spending – which comprises investment in infrastructure, skills and innovation. And it is this capital spending which has suffered severe cuts by the current Government.
3. Myths of Austerity: increased public borrowing will be expensive
A period of record low-interest rates is the time to invest. But the government hides behind the argument that an expansionary policy will lead to higher interest rates and will be penalised by ‘the market’. First, it is important to emphasise that the core interest rate is administered by the MPC of the Bank of England – it is decided by the Monetary Policy Committee not by some mystical market forces. And the market itself is not some form of natural phenomenon – but is dominated by a few institutions such as the credit rating agencies that recognise that a slow growing economy is not good for future debt reduction.
4. Myths of Austerity: burdening our children
The politic trump card is to involve our children. According to Cameron: “If we want good jobs for our children, we will not get them if we are burdened with debt”. There are two problems with this. First, we own most of public sector debt. Debt owned by UK households and businesses is not a direct burden on the future. There will be distributional issues as interests payments have to be paid by taxpayers, but much of the interest will be received by UK individuals and institutions (who are also taxpayers). Second, and most importantly, the biggest burden we can leave out children is a stagnant low-wage economy. And that is a likely legacy, without radical shift in policy that includes a significant increase in public sector investment.
There is not a ‘magic money tree’ but there are: negative real rates of interest: a desperate need to invest in the UK economy; and a well-established corpus of economic analysis which shows the benefit of expansionary fiscal policy in a period of stagnation.