An open letter to supporters of stimulus/opponents of austerity (especially Labour supporters)
Many in Britain believe that austerity is to blame for the lack of a robust recovery. Perhaps they would care to answer these questions
Dear Stimulus Supporter/Austerity Opponent,
The Government’s policy on the public finances continues to dominate our public debate. With the economy continuing to stagnate, many of you who believe in a looser fiscal policy claim that austerity is to blame for the lack of a robust recovery, as opposed to bigger structural problems.
With this in mind, I would be grateful if you could answer a few questions on your policy stance. Some of these will not apply to all of you, but to me they all appear key questions which have yet to be comprehensively answered by those who take your view.
1) Many of you claim that the Coalition plan has damaged our growth prospects by “cutting” more quickly than the Darling plan. Yet the fiscal consolidation had been factored into economic forecast models since 2010, and up until Autumn 2011, the Office for Budget Responsibility/HM Treasury/Item Club models still forecast a much quicker return to growth than we are seeing. If austerity has such a big effect, why didn’t it show up in the OBR/HMT/Item Club model?
2) If your answer to 1) is that the OBR/HMT/Item Club models are wrong, how can you continue to compare Coalition outcomes against forecasts from Darling’s plan generated by such a faulty model?
3) So far, the deficit closure seen has come from cuts to capital spending and tax hikes. Yet the cuts to capital expenditure were inherited from the last Labour government. Why, therefore, were you not more critical of the Darling plan to slash capital spending?
4) If you agreed with the Darling plan to cut capital spending, but still disagree with “austerity”, then why don’t you find common ground with supply-side economic liberals who agree that the new tax hikes (VAT, NICs, CGT, stamp duty, fuel duty) have hindered economic growth? Why do some of you advocate increasing the tax burden even further?
5) Many of you claim that we do need a plan for deficit reduction “in the medium term”. Yet, the Coalition’s existing plan is a medium-term plan which, even on the optimistic forecasts of the OBR for later in this Parliament, will only deliver a balanced budget well into the next Parliament (at least eight years from the start of the programme). Over what time period do you believe the budget deficit needs to be eliminated?
6) In 2011/12 the UK ran a deficit of 8.3 percent of GDP but yet GDP growth was only around 0.5 percent. What level of deficit do you believe is necessary to return us to robust growth?
7) Many of you appear on television and use phrases such as “the deficit position is worsening because of austerity” and “austerity is self-defeating”. Yet in the short-term it is almost impossible for deficit spending to be self-financing, without ridiculously high multipliers.
How big do you believe fiscal multipliers to be? Do you acknowledge that for open, highly indebted countries where the private sector is deleveraging, these are likely to be extremely low? Do you acknowledge that the findings of Friedman’s permanent income hypothesis, coupled with anticipated future tax hikes are also likely to undermine, at least in part, any temporary stimulus effects on output?
8) In the 1930s, when Keynes advised FDR on a stimulus programme, the US debt-to-GDP ratio was much lower than in the UK or US today. Do you believe, like Ken Rogoff, that these high debt burdens today will be damaging to future growth? Are you concerned that (unless you believe in the optimistic multiplier assumptions of DeLong and Summers) running higher deficits will take us much more quickly towards this high-debt, low-growth trap which Rogoff describes?
9) Many dismiss the possibility that the coalition's deficit reduction plan had any effect on bond yields, attributing low rates to a weak economic outlook and QE. How can this be reconciled with the fact that bond yields fell by 50 basis points between the last Labour Budget of March 2010 and the emergency Budget of June 2010?
10) Finally, after your temporary further spending binge, how would you go about balancing the budget? I admit this is quite a big question, but it is also one you tend to avoid.
Centre for Policy Studies
Ryan Bourne is head of economic research at the Centre for Policy Studies. Follow him on Twitter @RyanCPS
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