The sheen is starting to fade from the idea of austerity, and the U.K. is explicitly admitting as much. Cassidy claims that the U.S. has served as a “control” case, with the Obama Administration pursuing a Keynesian approach to Britain’s neoliberal one. I think that’s a debatable characterization of what the U.S. federal government has been doing, but we are perhaps Keynesian relative to someone, in this case Britain (and much of Europe).
With all the theatrics going on in Washington, you might well have missed the most important political and economic news of the week: an official confirmation from the United Kingdom that austerity policies don’t work.
In making his annual Autumn Statement to the House of Commons on Wednesday, George Osborne, the Chancellor of the Exchequer, was forced to admit that his government has failed to meet a series of targets it set for itself back in June of 2010, when it slashed the budgets of various government departments by up to thirty per cent. Back then, Osborne said that his austerity policies would cut his country’s budget deficit to zero within four years, enable Britain to begin relieving itself of its public debt, and generate healthy economic growth. None of these things have happened. Britain’s deficit remains stubbornly high, its people have been suffering through a double-dip recession, and many observers now expect the country to lose its “AAA” credit rating.
With Republicans in Congress still intent on pursuing a strategy similar to the failed one adopted by the Brits, this is a story that needs trumpeting. Austerity policies are self-defeating: they cripple growth and reduce tax revenues. The only way to bring down the U.S. government’s deficit in a sustainable manner, and put the nation’s finances on a firmer footing, is to keep the economy growing. Spending cuts and tax increases can also play a role, but they need to be introduced gradually.
In May, Osborne had announced an extension of the “era of austerity” through 2018, as the party’s target for national debt reduction seemed increasingly unachievable. Unfortunately, rather than change course then, he tightened the screws further in hopes that the same strategy would produce different results:
Osborne’s midyear budget statement was the moment for him to relax austerity and introduce convincing measures to stimulate the anemic levels of investment and growth that now threaten long-term damage to the economy. Unfortunately, Osborne continued to play the role of Iron Chancellor, arguing that to loosen fiscal policy now would spook markets, drive up the U.K.’s low borrowing costs, and put it on “the road to ruin.” (Business Week, Bloomberg View: Why Austerity in Britain Has Run Its Course, 12/6/12)
Bloomberg’s piece has a couple of interesting tidbits. First, it says Osborne has laid out a too-small set of spending programs, with the financial community urging greater spending:
The scale of the projects, however, is too small to be significant. The Ernst & Young Item Club, an independent group that examines U.K. budgets, figured that the £5 billion infrastructure package might increase growth by 0.2 percent. It recommends a package of similar spending worth £14 billion.
We don’t argue with Osborne’s original decision to embrace austerity—the hole that the banking crisis blew in the U.K.’s finances was huge. Yet a lot has changed over the past two or three years, and Osborne should recognize it. If he sets out a clear plan to bring down debt in the medium term, the benefit of his bid for credibility is that markets will probably believe him and understand the need to give a modest boost to the economy as growth stalls. In the next few months the British chancellor should use the trust he has built to ease austerity’s grip.
In this last paragraph, Bloomberg reiterates the need for austerity at the start (although it doesn’t explain why), but says that circumstances have “changed.” No mention of what these changes involve, or why Osborne might not recognize the need for a changed approach (calls for austerity by the financial community, perhaps?).