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Austerity or growth?
Oh, if only. If only it were that simple. If only these were alternatives between which we could choose at will. Then we could all unanimously put our crosses in the “growth” box, breathe a collective sigh of relief, proceed to enjoy the benefits of a growing economy and put austerity behind us. I’m sure that Cameron, Clegg and Osborne would like that as much as anyone, indeed probably more than anyone, because they would expect to reap political benefits as well as economic ones. Only fools and masochists relish the thought of austerity for its own sake.
This government, whatever else one might think of it, is not composed of fools or masochists. If they appear to be pursuing austerity it is not for its own sake, but as a means to an end, the end being a reduction in the national debt in the medium term leading to healthier public finances in the longer term. Meanwhile, in the short term, it is worth remembering that for all the talk of ‘cuts’ this government is continuing to run a substantial budget deficit, increasing the national debt in the process, even as they try to slow the rate of increase to a point when it can be reversed. As austerity goes, this is not actually very austere. As a cure for our addiction to public borrowing it is more akin to a programme of reduced dosages than cold turkey. But, they would insist, ultimately a reduction is essential; without healthier public finances, any temporary boost to the economy that might be achieved by borrowing and spending still more money would quickly be choked off as it became impossible to borrow at affordable interest rates, since creditors would doubt our ability or commitment to repay.
Against this, there are those who argue that without economic growth the public finances will continue to deteriorate in a vicious circle, despite the government’s best intentions to the contrary, because tax revenues will be depressed while spending on welfare benefits will increase. Fine in principle, but this argument assumes that a reliable way can be found to set such growth in motion. Since the Bank of England is already doing everything it can do – and arguably more than it should do – on the monetary front, it would have to be through fiscal policy. Their case is classically Keynesian: borrow more now to increase public spending on infrastructure projects and the resultant stimulus to economic activity should in the long run repay the investment, enabling the debt to be repaid as well. As to the readiness of creditors to finance the short-term spending, they point out that despite our historically high national debt the government is still able to sell bonds at historically low interest rates, lower even than the rate of inflation, which hardly makes further borrowing seem unaffordable, for now at least. Improbable though it may seem, UK sovereign debt appears at present to be regarded as a safe haven for international investors, almost on a par with Germany or (as improbable a candidate as the UK in view of its chaotic public finances) the USA.
So who’s right? (Or nearest to being right, since they could of course both be wrong – there could be no way out of the economic fix in which we find ourselves.) Writing on this subject a couple of years ago, I concluded that: “my own judgement, or guess, for what it’s worth, is that a relatively swift reduction in debt is desirable, and the government is broadly right to pursue it despite the associated risks… to follow this course allows more manoeuvring room if things go wrong. If the economy suffers a sharper reaction than anticipated there will be a better chance to loosen fiscal policy after this initial show of resolute retrenchment than there would be to tighten later if that became necessary in the face of a gilt market panic and a run on sterling.”
Well, the initial show of resolute retrenchment has had the desired effect, in that there has been no gilt market panic or run on sterling – rather the reverse lately – so we do have a bit of manoeuvring room. With the economy still at a low ebb, the argument is stronger now than it was then that we could risk taking a punt on a fiscal stimulus and hope that some growth ensues and will prove to be sustainable. The trouble is that: (i) it would be a punt, since there is no guarantee that the desired growth would ensue, especially as governments aren’t always very clever at directing their spending to wealth- or growth-creating projects; (ii) if it didn’t, we would merely be digging ourselves into a still deeper hole of debt than ever; (iii) that hole is already too deep for risks to be taken with equanimity, since our overall debt and deficit positions remain parlous; and (iv) the market confidence that has allowed the manoeuvring room might well evaporate as soon as the government was seen to be exploiting it to change course, making further borrowing much more expensive than it is now.
Paradoxical though it may seem, there are situations where borrowing more is a sensible preliminary tactic in pursuit of a strategy aimed at reducing one’s debts. On balance, my own – perhaps overly cautious – view is that this isn’t one of them, and that “going for growth” would be too big a gamble. Having stuck the course so far it’s worth continuing with the current strategy for the long haul, in the hope that austerity will sooner or later balance the books and allow us to move forward. Alluring though it is, the idea that we might be able to borrow our way out of debt this time is probably an illusion.