A Closer Look At "Austerity" In Britain

The forces that oppose absolutely any reduction of government spending anywhere and at any time use the current situation in the U.K. as their Exhibit A.  But when you look at the situation more closely, it's a classic example of the "austerity" scam.  By the "austerity" scam, I mean the confused use of a term combining spending cuts with tax increases as a device to claim that spending cuts do not work, when in fact the destructive force is the tax increases.

In the 2010 election, the Tories promised an attack on problems labeled as "debt" and "deficit."  From the 2010 Conservative manifesto:

A Conservative government will act now on debt to get the economy moving. We will deal with the deficit more quickly than Labour, so that mortgage rates stay lower for longer with the Conservatives.

To achieve those goals they proposed a number of reductions (or at least slowed increases) in spending (one year public sector pay freeze, raising the retirement age, reducing welfare dependency, etc.) and very little about taxes.  Three years later, economic growth remains sluggish, to say the least:  1.1% for 2011, 0.1% for 2012, and a big 0.3% for the first quarter of 2013.

Of course this has the advocates of maintaining all government spending (posing as enemies of "austerity") ecstatic.  For example, from Britain's left-wing Guardian newspaper, an article from January 2013 titled "Austerity plan is failing, IMF tells Osborne."  (George Osborne is the Chancellor of the Exchequer.).  Excerpt:

The IMF has never been wildly enthusiastic about Osborne's tough austerity plan for the British economy and has been saying for at least a year that the Treasury should ease off if recovery falters. But up until now it has tended to avoid telling Osborne that his policy is failing.  No longer, it appears. "We said that if things look bad at the beginning of 2013 – which they do – then there should be a reassessment of fiscal policy", Blanchard said.

Or, from the New Yorker magazine, an article entitled "It's Official:  Austerity Economics Doesn't Work."

Any decent economics textbook will tell you that, other things being equal, cutting government spending causes the economy’s overall output to fall, tax revenues to decrease, and spending on benefits to increase. Almost invariably, the end result is slower growth (or a recession) and high budget deficits. Osborne, relying on arguments about restoring the confidence of investors and businessmen that his forebears at the U.K. Treasury used during the early nineteen-thirties against Keynes, insisted (and continues to insist) otherwise, but he has been proven wrong.

That "any decent economics textbook" would undoubtedly be the Paul Samuelson opus, from the guy who made the most spectacularly wrong economic prediction of all time., namely that the demobilization from World War II and associated cuts in government spending would lead to economic disaster.

Well, do either these or the many other articles claiming vindication for opposition to "austerity" actually tell you what were the policies adopted by Britain during this 2010 - 2013 period?  No.  But Nicole Gelinas of the Manhattan Institute is just out with a long and detailed article in the current City Journal that goes into specifics as to what policies Britain has followed.  So what were the actual policies?  Very simple:  after promising large spending cuts and few or no tax increases, what they actually did was immediately increase taxes; as to spending cuts, they may have slowed future increases, but overall spending has gone up and not down.

Start with the VAT:  "Just after Christmas 2010, the VAT rose from 17.5 percent to 20 percent."

And how about the income tax:  "In early 2010, Osborne waved through Brown’s earlier plan to boost income taxes by 25 percent for people earning more than £150,000 annually, for a top rate of 50 percent."   How did that big income tax increase do at raising revenue?

As Osborne acknowledged two years later, “the behavioural response has been larger than expected.” Supposed to raise £2.5 billion annually, the hike raised £1 billion or less—and once enough time passes, the government has concluded, “it’s quite possible” that the result “could be negative.”

So, they did increase taxes, but did they also cut spending?

In his final budget document, in 2009, [former Labor] Prime Minister Brown had proposed to spend £646 billion for the fiscal year ending in 2011, up from £601 billion the previous year. In his first budget, Osborne lowered Brown’s £646 billion to £637 billion, and the government ended up spending even less than that: £629 billion. The deepest austerity that Britain had seen in a generation, then, was a 4.7 percent spending increase relative to the previous year. Yes, spending must keep pace with inflation if it’s going to buy the same quantity of goods and services. But the coalition’s 4.7 percent increase exceeded Britain’s 2011 inflation rate, which peaked at 4.5 percent.

So in fact the big 2011 "austerity" budget actually represented a spending increase.  And Gelinas reports that the plan for the coming year calls for spending 672 billion pounds, yet another increase, and 43.1% of GDP.  Recall that Thatcher's great accomplishment was cutting government spending from 48% to 38% of GDP.

So when you read that "austerity" economics doesn't work, apply a very healthy dose of skepticism.  Find an example of a country that actually cut government spending meaningfully as a percent of GDP without major tax increases, and check the result.  Hint:  Latvia, Estonia.