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We told you so: cut government spending and the deficit will rise

May 24th, 2011

Not a good start to the year for the Chancellor, and all those economists that so firmly backed his economic strategy. But vindication for Prof. Chick and myself, who warned the UK government in June, 2010 that if at a time of slump, government investment is cut, the deficit will rise. And so it has today…..

Below find my piece on Left Foot Forward. Tomorrow I am speaking at the Summit on Good Banking, organised by the new economics foundation and Compass…although I cannot find any details of it on their sites. Next week (on Tuesday evening) I will be at the Hay Festival, speaking on the cheerful subject of: “What if the Banks crash again?” …a session about which you can read more on the nef site.

Today’s post:

“One has to feel sorry for the chancellor. Many mainstream economists – in both the City and academia – backed him to the hilt: egging on his austerity policies, and boldly forecasting the rate at which the deficit would fall. The governor of the Bank of England caused controversy by endorsing the strategy. Markets greeted the austerity programme with euphoria. And No 10 was castigated for preparing a plan B.

Professor Chick and I were among the few to sound a warning, in our June, 2010 publication: “The economic consequences of Mr. Osborne” we insisted that once the private banking crisis had been transmitted to the real economy, fiscal consolidation would not ‘slash’ the government’s debt, but cause it to rise. Our argument was not based on ideological conviction, but on a century’s worth of macroeconomic evidence.

Today, those who shared our fears have been vindicated – even before the coalition’s deep, job-destroying spending cuts have been fully implemented. The announcement by the Office for National Statistics (ONS) that the deficit had widened dramatically in April by £10 billion -the largest April budget shortfall since monthly records began in 1993 – has been seized upon in shock by the chancellor’s friends in the media and the City. Without any apparent qualms, they have fallen over themselves to deplore the rise, and predict economic gloom.

Mr Osborne ought to choose his friends (and economic advisers) more carefully.”

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1 comment to We told you so: cut govt spending and the deficit will rise

Charles Wheeler

June 6, 2011 at 10:31 pm

“Some believe that the issue of the deficit is a distraction and that the real reason for the policy is that ‘dealing with the deficit’ is an excuse for
rolling back the state’s role in the economy – a classic right-wing aim. But the right is ultimately served by the outcomes for businesses, and people in business – still starved of credit and facing depressed demand – increasingly understand that their success and profitability are not well served by austerity policies. Approval
tends to come from large multinationals, who are in a very different position from that faced by small and medium-sized enterprises. Society is coming to understand the relation between the economy and the public sector is more complex and beneficial than the simplistic ideology that public sector spending is wasteful or parasitic.

Leading Conservatives of the past like Winston Churchill, Andrew Bonar Law and Harold Macmillan all came to understand this; it seems implausible that Prime Minister Cameron and Chancellor Osborne are so ignorant of the likely
consequences of their policies.”

This section from your updated ‘consequences’ PDF seems confused. The point that people who suspect the real intention behind the deficit fetishism is that Cameron and Osborne are prepared to pay the short-term price of unpopularity – even among their own constituency – for the long-term goal of achieving a neoliberal state by laying waste to the public sector and depressing the wages and expectations of workers in favour of capital. Social democracy was a victim of its own success by raising the living standards of the majority – and their expectation of further gain – at the expense of the financial elite. Since which time, wages for most have stagnated relative to the gains at the top, and the redistribution of income and wealth which had been a feature of the post-war consensus was reversed through the institution of a more regressive tax policy and the expansion of credit – which saw debt and interest flows moving in the opposite direction, with a consequent acceleration in inequality – something the housing market, the privatisation of higher education and healthcare promises to exacerbate.

The cuts represent the coup de grace in this process as we move towards a toll-booth economy.

The fact that previous Conservative leaders recognised the fallacy simply underlines the fact that this must be a deliberate, ideologically driven policy – these guys really do believe that they can ‘create our own reality’ – which seems to be based on Objectivism.

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We told you so: cut government spending and the deficit will rise

1 comment to We told you so: cut govt spending and the deficit will rise

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