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The truth about cuts and austerity

This is the truth about the so-called cuts and austerity; there isn’t much of it going on despite what Larry Elliott and others say. Just don’t let the bond markets find out

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Is the hysteria actually helping Osborne?
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John Phelan
On 16 February 2012 11:30

Economics editor Larry Elliott spouts far less drivel than most Guardian hacks but he put in a solid effort this week. Responding to the announcement that ratings agency Moody’s had put Britain on negative outlook Elliott wrote that Shadow Chancellor Ed Balls “has now been vindicated”

It might seem odd, as governments around Europe totter under the weight of their debts, that Elliott might consider Balls, a man whose sole economic idea in any situation is to borrow money and spend it, to be anything other than utterly deluded.

Elliott bases his bizarre claim on the Moody’s report blaming the shift to a negative outlook on a “weaker macroeconomic environment, which will challenge the government’s efforts to place its debt burden on a downward trajectory over the coming years” This, in Elliott’s eyes, is down to Chancellor George Osborne cutting spending “too far too fast” against the advice of Balls.  

This is an outrageous case of picking the facts that suit. Moody’s report actually gives the reasons for the change and they list “The increased uncertainty regarding the pace of fiscal consolidation in the UK due to materially weaker growth prospects over the next few years” and “the high risk of further shocks (economic, financial, or political) within the (European) currency union”

Balls and Elliott would argue that these “materially weaker growth prospects” are a result of government spending cuts. They would be wrong. They are the obvious result of an economy buoyed on debt having to readjust its spending to something more sustainable. Moody’s itself list the challenges as “reflecting the combined effect of a commodity price driven hit to real incomes, the confidence shock from the euro area and a reassessment of the lasting effects of the financial crisis on potential output”

And Moody’s hammer a final nail into Elliott and Balls’ coffin saying that “reduced political commitment to fiscal consolidation, including discretionary fiscal loosening”, following Balls’ advice, could prompt a downgrade. So much for vindication.  

But then the coalition’s attempts to get Britain’s ruinous borrowing under control are proving a rich source of hysteria. They prompt otherwise intelligent people to make nonsensical, easily refutable arguments that spending cuts are wrecking our economy and plunging us into some Dickensian dark age. Worse, these obviously erroneous things are said with such zealous, wild eyed passion that the terrifying prospect presents itself that these people actually believe them.

These arguments don’t survive even a brief encounter with some figures. In Labour’s last year in office government spending was £660.6 billion. In the fiscal year ending in April 2011, the coalition’s first in office, government spending came in at £683.4 billion. On current projections when the government closes the books on this fiscal year in April it will record spending of £703.4 billion.

This upward trend in government spending is projected to continue. In the fiscal year ending in April 2015 the government is currently projected to spend £760.5 billion. 

We have nominal rises in government spending every single year. But what does inflation do to this?

The table below shows the percentage increase in government spending each year, inflation (actual and predicted) for each year, and the effect this has on the percentage increase in nominal spending. 

 

  % increase in nominal spending on previous year Inflation Difference
2010 6.3 2.4 3.9
2011 3.4 4.9 -1.5
2012 2.9 4.6* -1.7
2013 2.7 2** 0.7
2014 2.5 2** 0.5
2015 2.7 2** 0.7

 

* Estimate based on figures for May 2011 to January 2012

**Estimate based on Bank of England projections

Only in two years, 2011 and 2012, do we see the ravages of inflation outweighing the effect of the nominal spending rises to produce real cuts in government spending. And any private sector enterprise could make the cuts we do see, 1.5 percent and 1.7 percent, simply by switching to cheaper toilet paper. Anyone who thinks that these cuts are either wrecking the economy or destroying the social fabric of the nation needs to find a dark room and stay there for a while.

Strangely enough these hysterics might actually be helping George Osborne. The only reason Britain with its Greek sized deficits has German level interest rates is because Osborne promises to get rid of the deficits. The low rates the Treasury can borrow at are, we are told, a reward for fiscal discipline.

But how long would these low interest rates last if the impression got about that Osborne isn’t actually cutting spending very much? The sound and fury omitted by those opposed to deficit reduction might actually be having the effect of making Osborne’s austerity appear tougher than it really is. The reward has been Osborne’s; those low interest rates which have kept a PIIGS style crisis at bay.  

This is the truth about the so-called cuts and austerity: there isn’t much of it going on despite what Larry Elliott and others say. Just don’t let the bond markets find out.

John Phelan is a Contributing Editor for The Commentator and a Fellow at the Cobden Centre. He has also written for City AM and Conservative Home and he blogs at Manchester Liberal. Follow him on Twitter at @TheBoyPhelan

Read more on: john phelan, the commentator, austerity measures, austerity and the cuts, Is George Osborne cutting too hard and too fast?, Is George Osborne cutting hard and fast enough?, Larry Elliot Guardian, UK Moody's rating, Larry Elliot Ed Balls, Coalition government spending, Government spending under Labour, treasury, and hysteria around cuts helping Osborne
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