speri.comment: the political economy blog

Austerity or growth?

The debate has reached a dead-end; reframing it is key to building a progressive future

Jeremy Green, Lecturer in International Political Economy, University of Cambridge, SPERI Honorary Research Fellow

Jeremy Green

Jeremy Green

For many of us, our attitude towards the politics of austerity will play a key role in how we vote during the next election. Since the crisis began the media has been buzzing with talk of ‘cuts’, ‘borrowing’, ‘belt-tightening’, ‘prudence’ and ‘savings’. All of us have become more familiar with the everyday language of austerity politics.

The debate has taken a familiar shape; in one corner we have the austerity advocates, calling for cuts, more cuts and faster cuts. Underlying their appetite for austerity is the conviction that cutbacks will prevent public spending from crowding out private investment, reduce government deficits and open the way for a trade-based, private sector escape route from recession.

In the other corner, we have the ‘borrow and spend’ brigade. Proponents of this view point to public borrowing costs at a record low, suggesting that now is a good time to borrow in order to create jobs and get the economy moving again. Their diagnosis of the crisis points to a shortage of demand, as over-leveraged households and companies tighten their belts in order to rebalance the books.

Too many cuts too soon, they argue, will deepen the recession and increase government deficits. The government will be forced to borrow more as it experiences declining tax revenues and covers increased social security payments due to rising unemployment.

With these two sides at loggerheads, the debate has reached an impasse. And as we saw on BBC Newsnight earlier this year, in a discussion between Nobel-winning economist Paul Krugman and an unholy alliance of venture capitalist Jon Moulton and Tory MP Andrea Leadsom, things can get heated. But is there something missing from the way the debate over austerity has evolved?

The answer is a resounding ‘yes’. Neither side of the conversation has really begun to address the critical failings of the neoliberal model that took us into the crisis. It’s a model that should be defunct by now, yet none of the major political parties are daring to look beyond it. This despite the fact that under this model successive governments have presided over a staggering increase in levels of inequality, with the growth in income inequality in Britain faster than in any other OECD country.

Both the austerity and ‘borrow and spend’ antidotes to the recession will likely deepen, not alleviate, the distributional inequalities at the heart of the current model. Cutting back public sector spending through the reduction of benefits, removes the safety net that maintains the income levels of some of the poorest in society. And at a time when private sector fears over future prospects are stifling investment, the current strategy has deepened the recession and choked off possible recovery.

The Keynesian alternative trumpeted by Krugman et. al. is not radically different. Increased spending to fund infrastructure development, with state consumption acting as a locomotive for growth, may create jobs and get us out of recession. But we need more than this for a model that moves us toward a more equitable and sustainable future.

Even if the government did step in as employer of last resort, funding infrastructural projects on a large scale, wages would likely be set at the minimum level. If not, government would inevitably face fierce private sector opposition to perceived inflationary impacts on wages.  If we do move towards a more full-blooded Keynesian recovery strategy, creating good quality and well-paid jobs will be key.

In any case, these measures are not likely to be given serious consideration under the prevailing neoliberal orthodoxy. Aspirations towards full employment were abandoned long ago and it’s now the norm to accept a ‘natural’ level of unemployment within the labour market.

To move towards a more progressive future, we need to fuse the debate about public spending and growth with another: offshore tax evasion. These two separate discussions have been running parallel, but in fact they are different sides of the same distributional coin.

A recent study from the Tax Justice Network has highlighted the massive scale of global offshore tax evasion, particularly by high-net-worth individuals.

And as the controversy around Starbuck’s ‘tax-free’ U.K. operations demonstrates, the longer-term rise in government debt is inextricably linked to the changing landscape of tax politics. Swelling corporate coffers are the flip side of creaking public finances.

Whether or not we move towards a progressive political economy will depend in part upon how the crisis is resolved in distributional terms. Quantitative Easing has been a great boost to the wealthiest members of British society. While the spending cuts will fall hardest upon Britain’s poorest.

Reversing the current trajectory of crisis politics will be key to ensuring a better future.  That’s why SPERI will be holding a conference on Europe’s response to the crisis in July. If we are going to abandon the neoliberal growth model that got us into this mess, for a more equitable and sustainable alternative, we will have to think outside the parameters of the current debate.

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Categories: SPERI Comment | 3 comments

Articles and comments posted on this blog reflect the views of the author(s) and not the position of SPERI or the University of Sheffield.

Comments (3)

  1. Cuts versus public spending, which is right? The simplest way to answer this question would be to look at the relationship between public spending and GDP in the UK since the war. We have had plenty of booms and busts so increased spending should precede recoveries and decreased spending precede downturns. I have plotted the data at:

    Does public spending stimulate the economy?

    What I found surprised me. Increasing public sector spending seems to be bad whenever it exceeds private sector growth. Take a look at the graphs in the link above. It happens every time over the past 70 years. If you want to improve the economy, in the UK at least, your simplest action is to cut public spending, or so it appears. Any comments?

    • Hi John,

      These are interesting graphs. A couple of points to be made here. Firstly, I think that it is important to disaggregate public spending- in particular looking at the amount that would be expended upon fixed capital formation and to also distinguish between sectors. Public expenditure on maintaining troops abroad, for instance, would be less likely to have a positive impact on British growth in my view.
      The way public spending is channeled is likely to be significant for how much growth is derived.

      Also, one can’t explain the relatonship between GDP growth and public spending in purely national terms as your graphs purport to do. Growth is determined by a broad array of factors, in particular trends in the global economy and the level of global demand for instance. This is especially true for a highly globalized and open economy like the UK. Levels of inward foreign investment would also be highly important in shaping growth patterns in sectors such as British manufatcuring

      Thus for instance, if the US were to embark upon a prolonged period of expansionary fiscal policy this would likely have a major impact on British growth. It is then, very hard to isolate a statistical relationship between the two factors.

      At present, global demand is low and at this point in time it makes sense to rely more heavily upon public expenditure and investment as an engine of growth.

      • Thank you for looking over the graphs, I must confess to being surprised that whether it was MacMillan, Wilson, Heath, Callaghan, Thatcher etc., with all their different ideologies and circumstances, the effects of increasing public spending were always negative for the non-public sector of GDP.

        Although you say “purport”, I originally did the exercise to see whether there was an optimal amount and circumstance for public expenditure as a stimulant. It was a first pass of the data to see if there were factors such as Wilson spending on military projects etc. that could be teased out. But the initial pass was sufficient to discover whether public spending is a stimulant for the private sector. The data say “no, never, no matter what is happening at home or abroad”, which is truly surprising, especially when increasing public expenditure is often used synonymously with “economic stimulant” in the media.

        I wonder if the almost immediate inflationary effect of large public spends is largely to blame for the negative effect of large spends. Smaller cash injections would rely on taxation which would also immediately suppress the non-public sector.

        What I really do not understand is why this relationship between public and non-public sectors of GDP is not common knowledge.

        You say “At present, global demand is low and at this point in time it makes sense to rely more heavily upon public expenditure and investment as an engine of growth.”, I would have agreed with this orthodoxy on Monday but the data I discovered on Wednesday suggest that the small decline in rate of growth of public spending in recent years is stimulating the non-public sector, look at the graphs….

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