A NOTE ON RECENT GROWTH AND AUSTERITY

The higher than expected retail sales figures, allied to the strong recovery in economic growth being experienced appear to call into question the anti-austerity measures argument that I, and other economists, have been deploying against the government over the past year. But do they?

Now that we have a sufficient period of statistics the picture is clearer.

First, the discretionary benefit cuts are continuing partly offset in 2012 and 2013 by the operation of the automatic stabilsers such as unemployment benefit (e.g. people being out of work for longer). In 2014, with growth recovering the government is now cutting these, by significantly tightening eligibility criteria.

Second, the size of the state public sector is continuing to be reduced, in line with the neo-liberal agenda of the government, e.g. privatisation continues and the size of local government has been reduced by a third.

Third, during 2012/2013 the pace of austerity, measured by the speed of reduction of the structural deficit, effectively stalled. This is why the government target of deficit reduction by the time of the next election has been abandoned. Plan A – as it is termed by the government – was effectively abandoned in 2012/2013; though the austerity rhetoric continued.

Fourth, for this reason in 2014 we are seeing economic growth returning. We may have to wait some years to discover why the severe austerity government policy from 2010 was substantially slowed in 2012/2013. I suspect because the government was scared by the internal economic projections provided by the Treasury and the OBR.

Fifth, as well as the above slow down in austerity, the government has embarked on a recovery which is partly fuelled by debt, and particularly mortgage debt. This has, by its impact on consumer confidence persuaded people to spend cash and incur consumer debt to spend on retail goods and services, helped also by a reduction in inflation.

Sixth, the other factor strengthening growth from the supply side has been the growth in the work force, much of which, ironically, has come from increased immigration.

The above summary explanation does not mean that we were wrong to challenge austerity. In fact the government’s actual policy stance over the past 2 years has proved we were correct to lobby against austerity. However, we should not relax. Specific austerity measures and a reduction in the size of the public sector are continuing, and the current recovery is unbalanced and over-reliant on private debt. Moreover, inequality is still disfiguring our society and is dysfunctional in economic terms. The message for the Labour party is clear. Do not repeat the mistakes on the Tories or of certain New Labour policies.

Dr Michael Lloyd

14th May 2014