The idiocy of austerity!

Two interesting stories about austerity today. One is a report in the Guardian today reporting that the International Monetary Fund (IMF) has estimated that George Osborne’s austerity measure will have sucked £76 billion out of the economy by 2015. The idea seems to be that every pound cut from government spending reduces economic output by some amount. The Office for Budget Responsibility (OBR) used a multiplier of 0.5 (i.e., 50p). The IMF, however, has suggested that the multiplier should be something between 0.9 and 1.7. If it’s bigger than 1 (as some now suggest) cutting £1 of government spending reduces economic output by more than £1.

I think this probably makes sense. If you pay someone money to do a job, the receiver of revenue gets about 40% back directly, through direct and indirect taxation. Furthermore, the money that doesn’t come back directly is spent paying for and buying things that will also attract tax. The person is also performing some task that has some value. If you decide to cut government spending so that people lose their jobs (as has happened), you end up paying them some money anyway (through benefits). A fair amount of what they are given will return to the public purse through various types of taxation, but they are no longer performing any direct economic function. For this to make sense, what they were doing before has to be worth less than the difference between what they receive now (in benefits) and what they were receiving when employed. This would seem to suggest that those who are now unemployed were being overpaid when employed which, given our skewed income distribution, would seem unlikely.

The other interesting story comes from Paul Krugman. The main point of his non-burden of debt post is (I think) that if most of your borrowing is internal (i.e., borrowed from your own population) then borrowing now doesn’t burden future generations. Any interest that is paid remains in your country and so it doesn’t actually reduce the wealth of future generations. In the UK I believe about 70% of the public debt is internal. Furthermore I think that an amount equivalent to the remaining 30% has been lent to the US. In a sense we (the UK population) own an amount of public debt equivalent to the total UK public debt. This plus the interest will, over time, return to the UK population. This is very different to Greece and Portugal, where most of the debt was external and so comparing the UK to them is extremely disingenuous.

If our borrowing remains like this, there is no real disadvantage to future generations unless the money borrowed could have been better spent elsewhere. Given that the current austerity measures appear to be depressing our economy, it doesn’t appear as though the money is being better spent elsewhere. If we can keep our borrowing primarily internal, it would seem sensible to borrow more so as to cut more slowly. It would then, if the IMF is correct, actually benefit our economy and, in the long-term, not costs us anything.


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