This was categorically not the case. In every country that cut government spending, almost every other category of spending also fell apart from net trade.
The result is that GDP growth after the crisis was worse — much worse in many cases — than before it for every country that pursued austerity economics. In , the IMF warned that it had greatly underestimated the relationship between government spending and the economy and duly revised its so-called multipliers up to between 0.
This change amounted to an admission that spending cuts had damaged economic growth and spending increases would support growth. Politicians and economists who defend austerity like to point to low productivity to explain away poor growth.
As we have seen, the labour market has mainly adjusted to low growth through price i. The bottom line is that the best way to avoid low productivity is to avoid cuts.
So Germany and Japan are among those who do least badly, while Spain and Ireland in fact do best but at the expense of sharply reduced employment growth.
Here we see the deficit the purple line blowing up in as government revenues the blue column collapsed during the global recession. The turnaround into did not come because of spending cuts, but because tax revenues recovered. But by , the imposition of austerity policies had stifled the economic recovery and reversed any gains in the public finances.
At this point George Osborne began to ease off the austerity, and the Bank of England threw the monetary kitchen sink at the economy. This pulled the economy back from the brink, helping to improve revenues and the public finances. Yet the recovery was always slower than expected, because going easier on austerity was still austerity.
Thankfully, the Bank of England has recognised in its November Monetary Policy Report that higher government spending is now boosting growth. They promised it would help to repair the public finances, but the national debt is bigger than ever. About unions. Workplace guidance.
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Corporate Governance and responsibility. Now its authors are back at it again. But it is not: in a slump, governments should spend to support living standards. We need to learn from last time to ignore the bleatings of those who want the economy to work in the interests of hedge funds, not ordinary people.
It is time to strengthen the NHS and communities after the damage the austerians did. The alternative to spending cuts is to invest in people and places through government spending, incentives to work and, if necessary, through central bank financing. Contrary to austerian logic, government spending crowds in private spending during a slump, rather than crowding it out.
This lesson must never be forgotten again. The UK is in the midst of a devastating economic crisis. Whole swathes of the economy have rightly been shut down to combat the spread of coronavirus, while an unprecedented package of government measures to support firms and families has been announced.
The combination of the two means tax revenues are falling and public spending is surging. And it could be even higher. And borrow it should — as with the lockdown these are not policy choices but the largely unavoidable price the pandemic imposes on us. But the economic damage may be long lasting, not least given the huge surge in unemployment as demonstrated by more than 1. This would mean a permanent hit to our public finances.
The last time the country was in this position in the wake of the financial crisis, George Osborne made two crucial decisions: to reduce the budget deficit swiftly and to do so overwhelmingly via spending cuts. It is simply not possible or desirable to repeat that approach — indeed it makes no sense economically or politically. First because securing the recovery rather than rushing to deficit reduction must be the priority.
And second there is little public support for austerity. No one looking at our public services today really thinks there is more fat to be cut. Tax rises will instead have to take the load. As we ponder which ones we need to remember where the economic pain of the crisis has fallen most heavily — on women, young people and the low-paid. While everyone will have to contribute, the burden must be fairly shared. Wealth has grown much faster than our incomes in recent decades.
But wealth taxes have not risen at all, and are riddled with problems. This is not a situation a post-virus Britain can afford. The economic consequences of the Covid pandemic are set to cause a record annual fall in carbon emissions of 8 per cent according to the most recent International Energy Agency estimate. This would be several times larger than the impact of the financial crisis, and, incidentally, almost exactly the rate needed to limit global warming to 1.
But far from being cause for celebration, this forecast should alarm us. That shutting down vast swathes of the global economy only just achieves the minimum required pace to meet the 1.
And, crucially, current emissions reductions have come at tremendous cost, with lives and livelihoods lost, businesses folding, and a devastating global recession looming. A systemic transformation of the scale required — from extraction and inequality to sustainability and shared prosperity — must be state and public led, and rooted in democratic accountability.
Indeed, as this crisis has made clear, the market alone is wholly unable to meet the pace, scale or degree of co-ordination required to confront complex global challenges, nor can private industry withstand major shocks without decisive state support. Far from a return to austerity, hostility toward public-led investment and an antipathy to state planning, confronting the climate crisis and building resilience to its impacts will demand unprecedented public investment and leadership.
This spans everything from delivering zero-carbon public transport; to ensuring a just transition for workers in affected industries such as fossil fuel extraction; to adequate investment in low-carbon forms of work such as health and social care that the current crisis has proven so crucial and so undervalued.
This crisis is teaching us, in tragedy, the indispensability of the social safety net, of resilient public services and of a capable state apparatus that can act decisively, using all available tools to prevent and minimise harm. Let us not forget these lessons as we look toward the climate crisis, and not waste an opportunity to rebuild an economy that is more sustainable, equitable and resilient. Soon after the financial crisis, as the British economy was struggling to recover, the then chancellor George Osborne embarked on a policy of fiscal austerity to repay the debts accumulated during the crisis.
That was a mistake that should not be repeated. Public spending has now been refocused on helping businesses and the public navigate the crisis. In my view, this is a necessary investment. The debts accumulated will be more than those that prompted Osborne to embark on his austerity project. In my view this debt does not need to be repaid, at least not yet. The economy will need the investment promised in the March budget as an absolute minimum. It will also be important to help the workers who lost their jobs, and the companies that struggled during the lockdown to get back to normal business.
Coronavirus will change demand and the way that we do business in unpredictable ways, and this will need more investment. Interest rates are ultra-low at present, and when the recovery starts pressure on prices will inevitably build up. To some extent, this will erode the debt in itself. It is important that the Bank of England does not raise interest rates quickly and allows for some inflation to take place; even the 2 per cent ceiling target might be sufficient but more flexibility from the Treasury would be even better.
The level of debt will probably not exceed per cent of GDP, a manageable level in an era of near-zero interest rates. As the economy fully recovers and sustainable growth begins, the situation can be re-evaluated. At that stage, and not before, we could consider using some of the future tax revenue for debt repayments. The government must continue to support business, stimulate growth and support workers through transition. Christopher Pissarides won the Nobel Prize in economics in It is clear that some commentators and think tanks have not woken up to the severity of the debt-deflationary depression we are heading into.
Delusional austerity enthusiasts have not given this threat much thought. Both groups fail to grasp the devastating scale and depth of the forthcoming depression, which will be prolonged and deep. Austerity would simply aggravate and lengthen the slump. At the behest of Montagu Norman, the then governor of the Bank of England, austerity was imposed on the UK economy after the last great pandemic — the Spanish flu of — with disastrous consequences.
Taxes were increased, government spending was cut, interest rates rose and the strengthened pound boosted debt servicing costs. Now what? An economy that is depressed even with zero interest rates is, in effect, an economy in which the public is trying to save more than businesses are willing to invest.
In such an economy the government does everyone a service by running deficits and giving frustrated savers a chance to put their money to work. Nor does this borrowing compete with private investment. An economy where interest rates cannot go any lower is an economy awash in desired saving with no place to go, and deficit spending that expands the economy is, if anything, likely to lead to higher private investment than would otherwise materialise.
At some point you do want to reverse stimulus. Instead, you want to wait until there can be a sort of handoff, in which the central bank offsets the effects of declining spending and rising taxes by keeping rates low. All of this is standard macroeconomics. I often encounter people on both the left and the right who imagine that austerity policies were what the textbook said you should do — that those of us who protested against the turn to austerity were staking out some kind of heterodox, radical position.
But the truth is that mainstream, textbook economics not only justified the initial round of post-crisis stimulus, but said that this stimulus should continue until economies had recovered. What we got instead, however, was a hard right turn in elite opinion, away from concerns about unemployment and toward a focus on slashing deficits, mainly with spending cuts. Let us not, however, be too harsh on the public. Many elite opinion-makers, including people who imagine themselves sophisticated on matters economic, demonstrated at best a higher level of incomprehension, not getting at all the logic of deficit spending in the face of excess desired saving.
That will tend to drive the price of the bonds down, and drive up interest rates. Beyond these economic misconceptions, there were political reasons why many influential players opposed fiscal stimulus even in the face of a deeply depressed economy. Conservatives like to use the alleged dangers of debt and deficits as clubs with which to beat the welfare state and justify cuts in benefits; suggestions that higher spending might actually be beneficial are definitely not welcome.
Meanwhile, centrist politicians and pundits often try to demonstrate how serious and statesmanlike they are by calling for hard choices and sacrifice by other people. As a result, centrists were almost as uncomfortable with the notion of fiscal stimulus as the hard right.
In a way, the remarkable thing about economic policy in was the fact that the case for fiscal stimulus made any headway at all against the forces of incomprehension and vested interests demanding harsher and harsher austerity. If this is right, there was inevitably going to be a growing backlash — a turn against stimulus and toward austerity — once the shock of the crisis wore off.
Indeed, there were signs of such a backlash by the early fall of But the real turning point came at the end of that year, when Greece hit the wall. But they had a problem: their dire warnings about the consequences of deficit spending kept not coming true. Some of them were quite open about their frustration with the refusal of markets to deliver the disasters they expected and wanted.
This is regrettable, because it is fostering a sense of complacency that can have dire consequences. Suddenly, austerians had a concrete demonstration of the dangers they had been warning about. A hard turn away from Keynesian policies could now be justified as an urgent defensive measure, lest your country abruptly turn into another Greece. Still, what about the depressed state of western economies? The post-crisis recession bottomed out in the middle of , and in most countries a recovery was under way, but output and employment were still far below normal.
Standard macroeconomics said that cutting spending in a depressed economy, with no room to offset these cuts by reducing interest rates that were already near zero, would indeed deepen the slump. But policymakers at the European Commission, the European Central Bank, and in the British government that took power in May eagerly seized on economic research that claimed to show the opposite.
The reason, he and those who seized on his work suggested, was that spending cuts create confidence, and that the positive effects of this increase in confidence trump the direct negative effects of reduced spending. This may sound too good to be true — and it was. The doctrine of expansionary austerity quickly became orthodoxy in much of Europe. At most, the Reinhart and Rogoff paper provided a backup bogeyman, an answer to those who kept pointing out that nothing like the Greek story seemed to be happening to countries that borrowed in their own currencies: even if interest rates were low, austerians could point to Reinhart and Rogoff and declare that high debt is very, very bad.
What Reinhart and Rogoff did bring to the austerity camp was academic cachet. Their book This Time is Different, which brought a vast array of historical data to bear on the subject of economic crises, was widely celebrated by both policymakers and economists — myself included — for its prescient warnings that we were at risk of a major crisis and that recovery from that crisis was likely to be slow.
So they brought a lot of prestige to the austerity push when they were perceived as weighing in on that side of the policy debate. They now claim that they did no such thing, but they did nothing to correct that impression at the time. When the coalition government came to power, then, all the pieces were in place for policymakers who were already inclined to push for austerity. Fiscal retrenchment could be presented as urgently needed to avert a Greek-style strike by bond buyers.
Economists who objected to any or all of these lines of argument were simply ignored. The first chart shows interest rates on the bonds of a selection of advanced countries as of mid-April What you can see right away is that Greece remains unique, more than five years after it was heralded as an object lesson for all nations.
Everyone else is paying very low interest rates by historical standards. This includes the United States, where the co-chairs of a debt commission created by President Obama confidently warned that crisis loomed within two years unless their recommendations were adopted; that was four years ago.
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