Transcript Austerity is the best way to reduce the deficit and get

“Austerity is the best way to
reduce the deficit and get the
economy back on track”
Owen Jones, The Independent
James Meadway, nef
nef (the new economics foundation)
The myth
“Like a family who has overspent, we need to reign in
our spending to get our finances in order and impress
the financial markets.”
nef (the new economics foundation)
In the wild
“Labour maxed out the nation's credit card, and they still
want to carry on spending. Ed Miliband and Ed Balls fail to
realise that when you're up to your neck in debt, it's time
to pay it off”
– Eric Pickles, March 2011
nef (the new economics foundation)
In the wild
“We are asking the British people to reduce the record
budget deficit and pay off the national credit card.”
– George Osborne, April 2011
nef (the new economics foundation)
In the wild
“If you have maxed out your credit card, if you put off
dealing with the problem, the problem gets worse.”
– David Cameron, June 2011
nef (the new economics foundation)
In summary
• The economy is not like a household. By
perpetuating recession, austerity fails to reduce debt
as a share of GDP
• Arguments in favour of austerity are flawed
• The evidence shows that austerity has failed
nef (the new economics foundation)
The reality: the economy is not like a household
• Every £1 spent is also £1 earned – by someone else.
So if someone spends less, someone else must earn
less (the “multiplier effect”)
• The main driver of this recession is a fall in spending
by businesses and households
• By also choosing to spend less, the government
worsens the recession
nef (the new economics foundation)
The reality: the economy is not like a household
Cuts in government
spending
Continued
recession
Debt rises as a share
of GDP
Rising deficit (falling tax
receipts, rising social
security payments),
slower growth
nef (the new economics foundation)
The reality: the economy is not like a household
“Austerity doesn't work. In conditions of inadequate
demand, budget cuts cause a more than proportionate
reduction in GDP – in technical terms the so-called
fiscal multiplier is greater than one. This means that for
every million pound reduction in the budget deficit, the
country's GDP falls by more than a million pounds,
leading to a rise in the ratio of debt to GDP.”
– George Soros, April 2013
nef (the new economics foundation)
In reality: the arguments for austerity are flawed
• The austerity argument relied heavily on two academic
papers
– Alesina and Ardagna’s argued spending cuts can produce
growth…
– …but they didn’t count periods of austerity properly
– Reinhart and Rogoff said high debt cuts growth…
– …but they messed up their spreadsheet calculations (amongst
other things!)
• Meanwhile, the IMF has dramatically changed its views
on the fiscal multiplier: “Our results indicate that
multipliers have actually been in the 0.9 to 1.7 range”
nef (the new economics foundation)
In reality: the evidence shows austerity has failed
Office for Budget Responsibility forecasts
110
105
100
95
90
85
2007
2008
2009
2010
OBR June 2010
nef (the new economics foundation)
2011
2012
2013
OBR March 2013
2014
Actual
2015
2016
In reality: the evidence shows austerity has failed
nef (the new economics foundation)
So why are they still doing it?
1. Ideology
2. The ‘global race’
3. Preparation for the next financial crisis
nef (the new economics foundation)
The alternatives
• Don’t cut! Spending cuts hurt people and have no
economic justification
• Invest and use industrial strategy to create decent,
sustainable jobs
• How do we afford it?
–
–
–
–
Tax the super-rich
Stop tax dodging by corporations and rich individuals
Green QE
Take advantage of record low borrowing costs
nef (the new economics foundation)