Osborne’s Plan B

Three months ago, when I was complainingabout the economic illiteracy shown in the Financial Times leaderentitled “Osborne wins the battle on austerity”, I focusedon the general point that austerity meant delaying the recovery, not preventing it ever happening. However there was another sense in which that leader, and all the similar comments made by many others, was wrong. Numbers from the latest OBR forecast allow me to give more detail on how Plan A was in fact put on hold, and the recovery we have had has followed a suspension of austerity. (Another reason for doing this is that some of the headline numbers are distorted by special factors, which the OBR corrects for now, but which may get lost later.)

To quote from that FT leader: “Since the austerity policy was still under way, claims that a “Plan B” was necessary to trigger a recovery had been proved wrong, [Osborne] argued. Mr Osborne has won the political argument.” From which you would gather that we are still following Plan A, which involved steadily reducing borrowing by, among other things, reducing the share of government spending in GDP.

So here are the numbers.

Osborne's Plan B

	2009	2010	2011	2012	2013	2014	2015	2016	2017
Deficit/GDP	11.0	9.3	7.9	7.8	7.5	6.5	5.5	3.7	2.3
Cyclically Adj	8.7	7.1	6.0	5.9	5.1	4.0	3.2	1.7	0.7
G Con growth	0.7	0.5	-0.1	2.6	0.4	-0.7	-0.4	-1.0	-1.8
G Con/GDP	23.2	22.7	22.0	21.8	21.0	20.5	19.7	18.8	17.7

Notes. First two rows are for financial years, second two calendar years. Row 1: Deficit/GDP is PSNB/GDP as a %, adjusted for Royal Mail and APF. Row 2 is the same, cyclically adjusted. Sources for both are OBR December Autumn Statement Forecast Table 4.34 and their historical database. Row 3, percentage growth of real government consumption, source OBR Table 1.1 and ONS. Row 4, source OBRChart 3.29.

We start with the deficit as a percentage of GDP. This was very high in 2009, partly because of the recession, but also to stimulate the economy. Austerity began in 2010, and continued in 2011, with sharp falls in the deficit. But in 2012 the deficit was much the same as it was in 2011. There is then a (forecast) modest fall in 2013, followed by a projected return to austerity from 2014 onwards. We get a similar pattern if we cyclically adjust these numbers (using OBR estimates of the output gap).

An alternative summary statistic to judge the fiscal stance is to look at government consumption of real goods and services. Although this tells only half the fiscal story, because it ignores taxes and transfers, many people will be able to smooth the income effects of tax changes through saving. Government consumption, however, feeds straight through into demand. Real Government Consumption showed little growth in 2010, fell slightly in 2011, but increased by over 2.5% in 2012. These numbers depend on the government consumption deflator, which may not be very well measured, so the final row shows the share of government consumption in GDP. The pattern is similar.

So there you have it. Plan A was temporarily abandoned. Austerity stalled. Was that important in boosting the recovery that followed in 2013? We cannot know for sure, but that is not the key issue here. The important point was that Plan A was clearly put on hold. Claims that the government stuck to Plan A are false. The reason Plan A was abandoned, of course, was that it was delaying the recovery, and the government needed a recovery before the next election.

Nothing I have said here is particularly new – Jonathan Portes made the same pointin September, for example. Of course the right wing media (which the FT shows signs of wanting to join) ignore these facts. The interesting question is whether others in the media will follow their lead. They did so with the mythof Labour profligacy – but that was based on a half-truth. They continue to treat the economic impact of austerity as controversial (despite the OBR and European Commission numbers discussed hereand here), but there will always be some economists who make it appear so. But in this case the numbers are actual data, and their implication is absolutely clear. So we will see if the myth that Osborne stuck to Plan A survives, and we really do have to live with a post-truth media. 

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Ditulis oleh AndreSurbakti pada tanggal Selasa, 17 Desember 2013