OBR shows how austerity killed growth

The OBR published a short note last week showing the impact on growth from the fiscal decisions taken by the Coalition Government. This is not a revelation. The OBR has said before that austerity would have and has had a negative impact on growth, but the chart it produced with this note is quite striking. Here’s the chart.Screenshot 2015-10-27 at 6.13.47 PM

It shows that following the crash, Labour’s discretionary fiscal policy (that’s active changes to government spending and taxation) had a positive impact on growth of around 0.3% in 2008/9 and 2009/10. Labour enacted a fiscal stimulus, but not a very big one.

It’s what this chart shows about the period after the 2010 election though that’s most interesting. After assuming power in 2010, the Coalition embarked on it’s policy of austerity. When it was formed, the OBR actually thought austerity in the first year would have a bigger negative impact than it in fact did, but it still provided a drag on growth of about 1% in 2010/11. 2011/12 was actually the year when austerity really started to kick in. When the OBR made it’s first forecasts though, it thought austerity would have a negative impact on growth of around 0.6%. In actual fact though, it was more like 1%.

It’s fairly well known now that despite the rhetoric, George Osborne actually responded to terrible growth figures in 2011 and 2012 by easing up on austerity, and this can be seen clearly in the chart above. In 2012/13, the government’s discretionary fiscal policy had a very small negative impact on growth, turning to a very small positive impact in 2013/14.

In 2014/15 though, the year before the election (coincidentally I’m sure), George Osborne’s discretionary fiscal policy made a positive contribution to growth of over 0.3%, which is more than Labour’s stimulus provided after the crash. So growth is only at the level it is now because of the positive impact of fiscal policy, something that many Conservatives don’t want to hear.

We are to believe that more cuts are on the way as Osborne tries to achieve a surplus by 2019/20, but if he goes ahead with the cuts implied by his plans – tax credits being only one part of it – it seems likely this negative drag will continue. Coupled with prospects for growth in the rest of the world looking bleak, it seems unlikely that growth can persist alongside spending cuts. Something will have to give.

Advertisements

7 thoughts on “OBR shows how austerity killed growth

  1. Look at the likely regional distribution of this.

    Living costs in the North are rather lower, and massively lower as to property costs, than in the South, This means that low wage workers in the North can live off lower wages than low wage workers in the South, and this has two consequences:

    * Tax credits will go disproportionately to low wage workers in the North, and will benefit them a lot more than better paid low wage workers in the South.

    * Lower wages and property costs in the North will be an incentive to put plants that employ many low wage workers, like warehouses or packed-lunch ones, in the North.

    Now cutting tax credits and boosting the minimum wage seems designed to push up house prices in the South by undermining employment and living standards in the North and boosting employment in the South:

    * Lower tax credits mean lower deficits and thus lower interest rates and taxes and bigger better asset prices, plus it will push some Northern low wage workers to move to the South, pushing up rents and demand for property.

    * A higher *national* mininum wage will considerably reduce the incentive to create plants employing many low wage workers in the North, and this will boost emplpyment and property prices in the South. On yer bike!

    Look for example at the impact on immigrants, and not just from North to South: it greatly reduces their ability to find jobs in the North, where accomodation is far cheaper and more plentiful, and will increase their incentive to pack themselves 4-to-8 to a room paying amazingly profitable rents to property speculators in the South.

    So the $16b losses over 4-5 years will mostly hit Northern workers, and the benefits will mostly boost Southern property speculators. Surprised?

    These maps of the impact of previous “welfare reforms” on various counties shows how carefully they are targeted (and the civil service experts can tell governments the same information at planning stage), for example the summaries at pages 17-19, and the details on pages 27-28 (the “fuck the old miners reform”), and for tax credits (the first round) page 30:

    http://www.cpes.org.uk/dev/wp-content/uploads/2013/08/5-fothergill-Welfare-reform-Cambridge-talk.pdf

    So true to form, but the idea of boosting the national minimum wage so to discourage job creation in the North and boosting rents and house prices in the South is quite admirably cunning.

  2. Reblogged this on | truthaholics and commented:
    “We are to believe that more cuts are on the way as Osborne tries to achieve a surplus by 2019/20, but if he goes ahead with the cuts implied by his plans – tax credits being only one part of it – it seems likely this negative drag will continue. Coupled with prospects for growth in the rest of the world looking bleak, it seems unlikely that growth can persist alongside spending cuts. Something will have to give.”

  3. I am quite unconvinced that Osborne, even if he were given 50 years at the Treasury, could ever achieve a surplus, no matter how far or how often he moves the goalposts. Every time he makes cuts, the subsequent loss of stimulus means that the deficit only narrows briefly and then starts to widen again. He has set a ladder on a bed of quicksand, and is franticaly trying to climb it while it sinks into the mire beneath his feet. The net altitude gained is minimal.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s