Austerity vs. investment. James Meadway Senior economist New Economics Foundation

Transcription

1 Austerity vs. investment James Meadway Senior economist New Economics Foundation

2 Current UK situation Double dip recession Two consecutive quarters of negative growth Further decline in manufacturing output Long-term unemployment highest for 16 years Austerity measures about 11% completed Widening government deficit February 2011: 4.3bn February 2012: 11.1bn Business investment fallen 43bn since 2008 Drop in household spending steeper than previous recessions

3 Last five UK recessions

4 Long-term trends Median real incomes stagnant or falling Forecast to fall 7% this year Inequality increasing over three decades Fastest rate of increase in OECD group of developed countries Productivity growth is weak Gap with US, France and Germany is widening Public sector responsible for 56% of jobs created since c.1980 Manufacturing employment fallen 4m Not replaced by private sector work

5 Austerity and stagnation Austerity lesson known since 1930s One person s spending is another s income: the multiplier effect If nobody spends, nobody sells Evidence across Europe is compelling Greece, Spain, Ireland, Portugal Driver for UK recession is collapse in spending Households retrench, business sit on cash Exports do not recover: depreciation has not closed trade deficit and then government also attempts to cut Worst single policy to follow is austerity

6 Prospects for recovery Essentially nonexistent in the short-term Short of miracle, will not happen while austerity is in place Legacy of low investment by businesses over decades c.16% GDP, , below comparator countries Infrastructure is chronically poor Dieter Helm estimate: 500bn needed over 10 years to meet comparable Western European standards 70% GDP in low-growth sectors (Tim Morgan, 2011) but is government a problem?

7 bn UK government taxes and revenues, Taxes Spending

8 %GDP UK national debt,

9 %GDP Taxation and public spending, Spending Taxes 30.0

10 Current aggregate taxation not excessive Total tax burden comparable to developed nations OECD average, 2008: 34.4% GDP UK, 2008: 38.6% GDP Down from 40.4%, Corporation Tax at 22%... 18% lower than the US; 16% lower than Japan; 8% lower than Germany But the burden is not distributed fairly Evasion estimated at 70bn a year Bottom fifth households pay c.40% income in tax Top fifth households pay c.35% income tax

11 Cannot rely on private sector growth alone UK s cumulative problems are huge But a simple retreat of government is unlikely to work Estimate 600,000 government jobs to go but private sector is historically poor at creating employment Rebalancing is not happening Inequality rising Manufacturing currently falling Scale of change needed is immense

12 The burden of debt

13 No return to old growth model Growth of previous decade did not deliver Rises in GDP did not turn into rising real median incomes Expansion of finance attempts to compensate Consumer borrowing Growth of the City of London Physical and environmental impacts Rising commodity prices Climate change But private sector alone unlikely to deliver change and nor can government continue as before

14 Transfer payments as share of UK government spending, % 40% 35% 30% 25% 20%

15 Public action can take a lead More intelligent spending needed Tax-and-transfer not enough Implicit guarantees for finance must go Scale of challenge requires direct intervention and industrial policy East Asia, Finland Direct role for government in driving innovation Implicit UK industrial policy in pharmaceuticals, aerospace Alongside transformation of finance and related efforts to reduce inequality and actions to reduce environmental impact

16 Conclusion Austerity is failing, and was always going to Austerity plus or scorched earth is based on faith Government has failed, but size as such is not its failure Intervention and industrial policy can and should be used Adam Smith: economics as a moral science Choices reflect values Political discussion matters