There is an alternative to austerity
Despite what politicians say, the way to reduce the UK’s fiscal deficit is to boost production, not curb consumption.
The economy looks certain to be one of the fiercest areas of debate in Britain’s forthcoming election. Both the Conservatives and the Liberal Democrats will argue that they have the best approach to tackling Britain’s huge debt burden while excoriating Labour’s record. Labour will counter that the country’s economic problems are the unavoidable consequence of a global downturn and only it can make the necessary spending cuts responsibly.
Although the politicians will no doubt argue vociferously, the differences between them will be small. The overwhelming emphasis of the debate will be on how best to bring Britain’s burgeoning public debt under control and on exactly when, where and how public spending cuts should be made. Discussion of how to promote long-term economic growth will receive relatively little attention. It will not be so much rearranging the deckchairs on the Titanic as negotiating a repayment structure to ensure the deckchair owners get their money back.
Many of the more astute mainstream commentators implicitly acknowledge that much of the electoral debate on the economy is posturing. Martin Wolf, the chief economics commentator of the Financial Times, ended a recent article on the subject with a note of despair: ‘Neither side is convincing, given not just the scale but also the complexity of the challenge that lies ahead.’ Jonathan Loynes, an economist at Capital Economics, has argued that ‘The gap between the two main parties is probably not as wide as the rhetoric suggests’. Even Mervyn King, the governor of the Bank of England, has acknowledged that in relation to ‘fiscal consolidation’ (in other words cuts) ‘there’s a broad consensus across all political parties’.
To appreciate fully how banal the debate is it is first necessary to look at Britain’s debt burden and its fiscal problems in particular. It is then possible to set this against the real need of the economy for further growth along with, to the extent they have them, the main parties’ policies for promoting greater prosperity.
It should be acknowledged at the start that Britain does have a fiscal problem. Even before the financial and economic crisis of 2008 the level of public spending – along with debt levels in general – was rising rapidly. Once the recession hit the fiscal position became even worse. Tax revenues fell as unemployment rose and companies experienced difficulties. Much of the bailout of troubled financial institutions also in effect amounted to a transfer of debt from the private to the public sector.
Britain’s debt problems have been spelt out fairly dispassionately by such organisations as the Institute for Fiscal Studies (IFS), with its green budget, and the McKinsey Global Institute. The figures do not look pretty. According to McKinsey Britain’s total overall debt, at 382 per cent of GDP, is higher than every other major economy except Japan, even after adjusting for foreign lending by British banks. But it is not just the level of debt that is a problem but the rate at which it is increasing. From 2000 to 2008, Britain’s total domestic debt grew at a faster rate than any other major economy except Spain.
Even just looking at Britain’s government debt alone it is large and growing rapidly. The recent economic volatility and political unrest in Greece gives some indication of what could happen to other heavily indebted countries including Britain.
In principle there are two main mechanisms through which Britain’s debt burden can be reduced by squeezing consumption. The first is to increase taxes. In practice this is likely to mean cuts in real incomes for the mass of the population. The alternative is to reduce public spending. Here the burden will fall on workers in the public sector as well as the users of many public services. The likely scenario is for a combination of both rising taxes and spending cuts with the emphasis on the latter. Either way it will mean that most people will suffer the effects of austerity.
But there is another way. The alternative to curbing consumption is to boost production. If the economy grows faster than expected it will mean that debt repayments will be much easier. In that respect it is analogous to a person whose income rises and therefore finds existing loans less of a burden. Debt repayments are lower relative to the rapidly rising income.
This is in addition to the key benefits of economic growth such as rising living standards and greater innovation. A growing economy is good in itself as it provides the basis for greater prosperity for the mass of the population. Dynamic economies also tend to enjoy more scientific development and technological innovation.
Yet, if anything, the problem of low economic growth is even more severe than the mainstream discussion suggests. The latest pre-budget report assumed a central estimate of the economy’s trend rate of growth – the rate at which it is likely to grow over the long term – of 2.75 per cent. In contrast, the IFS green budget estimated it as 1.75 per cent. Although one percentage point might not seem like a lot it makes a big difference when compounded over the long term.
Of course the main parties understand in principle that rapid growth can have beneficial effects. They even have policies to promote growth. But these policies are a sideline in the mainstream economics discussion and, to the extent they are raised, the debate is limited.
Last week’s government announcement of proposals to build a high-speed rail network linking Britain’s main cities is a perfect example of limited horizons. Anyone just reading the headlines might assume it was a huge, ambitious investment in new cutting edge physical infrastructure. But a closer examination reveals a different story. Work on the new network will not start until 2017 and the first stage, linking London to Birmingham, will be completed by 2026 at the earliest – and that is assuming the project is not stalled or even shelved. The government has also refused to commit itself to building a new station at Heathrow airport as part of the project.
In addition, one of the government’s main motivations for building the rail network is as an alternative to air and road travel. Rail is probably its favourite form of transport besides cycling. Yet even the type of transport it likes best is receiving relatively little investment. If Labour is re-elected it is hard to see many new airports being built in the coming years or much major road building.
Nor do the Conservatives offer much of an alternative. Its economic vision was spelt out recently by George Osborne, the shadow chancellor, in his Mais lecture on ‘a new economic model’. The final section on ‘supply side’ reforms looks like a feeble reheated version of the Thatcherite programme of the 1980s. It centres on a programme for raising public sector productivity that sounds more like a recipe for job cuts than for promoting growth. Nothing was mentioned about promoting innovation or building new physical infrastructure.
This all begs the question of why there is such an aversion to growth among the main parties. The most immediate answer is what could be called ‘bubblephobia’. The parties agree that a financial bubble built up over the past decade and then burst with damaging consequences. One of their main fears is that a return to strong growth could end in a similar way.
Such a fear is misplaced for two related reasons. First, just because a debt-fuelled consumption boom ended in disaster it does not follow that any form of rapid growth will necessarily finish that way. The challenge is to restructure the economy so that it can deliver strong and consistent growth. Second, rather than see the past decade as one of excess consumption it is better viewed as one of sluggish production. Consumption growth ran ahead of rising output only because not nearly enough was done to invest in and reinvigorate the real economy. The authorities simply took the easy option of pumping in credit and relaxing rules on lending to provide a quick fix.
But a strong cultural aversion to economic growth pre-dated the emergence of economic crisis in 2008. Since the 1970s growth has increasingly been seen as constrained by environmental, social and moral limits: a trend I call growth scepticism. Although politicians still profess support for growth in principle they are typically anxious about what they see as its destabilising consequences. Their vision of growth is exceedingly limited.
Several factors underlie the emergence of growth scepticism including the demise of a belief in progress, the historic defeat of the left and deindustrialisation. Examining these elements is beyond the scope of this article but they are discussed in detail in Ferraris For All, my forthcoming book on the subject.
The results of the prevalence of growth scepticism are clear. It means that economic policy debates move even further way from any discussion of people’s real needs. Instead a narrow conception of economics reigns with curbing consumption seen as the only solution to the challenges of a troubled economy. Economic debate then becomes reduced to a matter of discussing exactly how, when and where austerity should be imposed.
Britain’s impoverished economic policy debate shows more than ever the need for the emergence of real political alternatives based on meeting the needs of the mass of the population. Unfortunately there is no sign of such a trend just yet. Discussing how strong economic growth can be achieved would be a good start.
Previously on spiked
Rob Killick attacked the spurious battle of the economists and explained why, for the economic crisis, this is only the end of the beginning. Mick Hume warned that the no/low-growth economy might become the New Normal. Sean Collins criticised the new-found faith in John Maynard Keynes. Daniel Ben-Ami argued that blaming bankers glosses over long-term economic decline. Rob Lyons revealed the truth about the unemployment stats. Or read more at spiked issue Economy.
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