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Vindication, of Sorts, for Austerity in Britain Britain’s Unhelpful Austerity Debate
(about 20 hours later)
LONDON — On Sept. 14, 2007, a full year before Lehman Brothers went bust, lines of panicked depositors formed outside the British mortgage lender Northern Rock, producing the country’s first bank run in 150 years. From the start, Britain was among the countries hit hardest by the financial crisis.LONDON — On Sept. 14, 2007, a full year before Lehman Brothers went bust, lines of panicked depositors formed outside the British mortgage lender Northern Rock, producing the country’s first bank run in 150 years. From the start, Britain was among the countries hit hardest by the financial crisis.
Britain suffered the first and the biggest banking failure of that crisis. With an even greater dependence on its financial sector than the United States — but neither the shale gas boom nor a reserve currency to help fuel a recovery — its public debt as a share of gross domestic product has more than doubled over the past six years and hovers close to the 90 percent mark, like Spain’s. As recently as January this year, a “triple-dip recession” still featured prominently in forecasts as doomsayers blamed a controversial program of public sector cuts for the lack of recovery.Britain suffered the first and the biggest banking failure of that crisis. With an even greater dependence on its financial sector than the United States — but neither the shale gas boom nor a reserve currency to help fuel a recovery — its public debt as a share of gross domestic product has more than doubled over the past six years and hovers close to the 90 percent mark, like Spain’s. As recently as January this year, a “triple-dip recession” still featured prominently in forecasts as doomsayers blamed a controversial program of public sector cuts for the lack of recovery.
But today Britain is expanding faster than most advanced economies. Gross domestic product powered ahead at an annualized rate of 3.2 percent last quarter, unemployment is receding (albeit slowly), and the housing market is booming. The Office for Budget Responsibility, which provides independent estimates, revised its growth forecasts for this year upward to 1.4 percent, from 0.6 percent, and said the economy was on course to grow 2.4 percent next year.But today Britain is expanding faster than most advanced economies. Gross domestic product powered ahead at an annualized rate of 3.2 percent last quarter, unemployment is receding (albeit slowly), and the housing market is booming. The Office for Budget Responsibility, which provides independent estimates, revised its growth forecasts for this year upward to 1.4 percent, from 0.6 percent, and said the economy was on course to grow 2.4 percent next year.
Has austerity — that feared and elusive byword for draconian welfare cuts — won the day?Has austerity — that feared and elusive byword for draconian welfare cuts — won the day?
George Osborne, Britain’s chancellor of the Exchequer, who has overseen some 60 billion pounds in welfare and spending cuts so far, certainly thinks so: “Britain’s economic plan is working,” he proclaimed in last week’s Autumn Statement, an annual update to Parliament on the government’s economic strategy. By 2019, he wants a budget surplus thanks to total cuts and tax increases worth about 10 percent of G.D.P.George Osborne, Britain’s chancellor of the Exchequer, who has overseen some 60 billion pounds in welfare and spending cuts so far, certainly thinks so: “Britain’s economic plan is working,” he proclaimed in last week’s Autumn Statement, an annual update to Parliament on the government’s economic strategy. By 2019, he wants a budget surplus thanks to total cuts and tax increases worth about 10 percent of G.D.P.
Under Mr. Osborne, Britain has become the embodiment of austerity in a global debate that has broadly pitted those believing a sustainable recovery demands strong signals to markets about budgetary stability against those arguing in favor of borrowing more to stimulate growth.Under Mr. Osborne, Britain has become the embodiment of austerity in a global debate that has broadly pitted those believing a sustainable recovery demands strong signals to markets about budgetary stability against those arguing in favor of borrowing more to stimulate growth.
Those in the stimulus camp who liked to point to “a natural experiment” playing out between Britain and Japan, where stimulus measures introduced by Prime Minister Shinzo Abe produced a burst of economic activity earlier this year, have gone quiet. Abenomics, as Mr. Abe’s approach was soon dubbed, has not proved to be the panacea some had hoped. On Monday, Japanese growth for the third quarter was revised downward to an annualized 1.1 percent, less than a quarter of the pace recorded in the first three months of the year.Those in the stimulus camp who liked to point to “a natural experiment” playing out between Britain and Japan, where stimulus measures introduced by Prime Minister Shinzo Abe produced a burst of economic activity earlier this year, have gone quiet. Abenomics, as Mr. Abe’s approach was soon dubbed, has not proved to be the panacea some had hoped. On Monday, Japanese growth for the third quarter was revised downward to an annualized 1.1 percent, less than a quarter of the pace recorded in the first three months of the year.
At the very least, says Kenneth Rogoff, a professor of economics at Harvard and co-author of “This Time Is Different,” a history of financial crises, this suggests that “the anti-austerity camp has lost the argument.”At the very least, says Kenneth Rogoff, a professor of economics at Harvard and co-author of “This Time Is Different,” a history of financial crises, this suggests that “the anti-austerity camp has lost the argument.”
“You can no longer blame sluggish growth in Britain over the last few years on austerity and austerity alone,” Mr. Rogoff said. If a 20 percent depreciation in the British pound has not led to an export boom, it is in large part because of the crisis next door in the euro zone, Britain’s main trading partner, he said.“You can no longer blame sluggish growth in Britain over the last few years on austerity and austerity alone,” Mr. Rogoff said. If a 20 percent depreciation in the British pound has not led to an export boom, it is in large part because of the crisis next door in the euro zone, Britain’s main trading partner, he said.
But if the anti-austerity front has been weakened, it does not follow that the pro-austerity camp has won.But if the anti-austerity front has been weakened, it does not follow that the pro-austerity camp has won.
“The strength of the recovery probably owes something to the fact that fiscal tightening almost stopped this year and last,” said Simon Wren-Lewis, a professor of economics at Oxford University. The Office for Budget Responsibility calculated that the amount by which the government overspent its revenue — its primary deficit — hardly fell over the past two years when adjusted for the economic cycle.“The strength of the recovery probably owes something to the fact that fiscal tightening almost stopped this year and last,” said Simon Wren-Lewis, a professor of economics at Oxford University. The Office for Budget Responsibility calculated that the amount by which the government overspent its revenue — its primary deficit — hardly fell over the past two years when adjusted for the economic cycle.
The recovery has come about, in other words, “partly because austerity was put on hold,” Mr. Wren-Lewis said.The recovery has come about, in other words, “partly because austerity was put on hold,” Mr. Wren-Lewis said.
Indeed, what the recent numbers seem to prove is that a debate juxtaposing budget discipline and stimulus is itself unhelpful.Indeed, what the recent numbers seem to prove is that a debate juxtaposing budget discipline and stimulus is itself unhelpful.
Over time, economists on both sides agree, a sound recovery needs both: stimulus in the short term and sustainable public finances in the long term.Over time, economists on both sides agree, a sound recovery needs both: stimulus in the short term and sustainable public finances in the long term.
But, as Mr. Rogoff put it: “That’s a difficult balance to strike.”But, as Mr. Rogoff put it: “That’s a difficult balance to strike.”