Is Austerity Working?

Over the last few months the tide of economic reporting in the media seems to have changed. Stagnation and flatlining are out as recovery and growth are back. This culminated in the euphoric headline of a piece by the normally measured and steady David Smith in today's Sunday Times, 'NO MORE ARGUMENTS. AUSTERITY IS WORKING'. I have to confess to have been rather taken aback by such exuberance, especially as the data that has been released didn't appear to warrant such an unequivocal conclusion. The view seems to be that because growth for this year is going to be bigger than originally forecast and forecasts for the next few years have been revised upwards, then stagnation is over, the Coalition's Austerity policy has triumphed and George Osborne has been personally vindicated, his critics vanquished.

Yet Stephanie Flanders writing in the FT this week reminded us that although growth forecasts for this year and next have gone up in “the biggest upwards revisions since the millennium”, this is a rather selective viewpoint. In fact, if we go back to the last Autumn Statement, then the Chancellor was expecting growth in this year to come in at 1.2%. Last week he revised this up to 1.4%. Does a 0.2% outperformance really deserve such a fundamental change in the reporting of the economic weather?

And what of the upwards revisions to the GDP forecasts for the next few years? Granted this is good news, but you would think that serious commentators would greet these with a little more caution, bearing in mind that the Government's record on managing the UK economy up until now has been one of failing to hit any of its growth forecasts. Until last week the Coalition was always promising low growth this year and higher growth thereafter, a story of just bread for now, but definitely jam tomorrow. But tomorrow never came. And indeed it still hasn't. It will really definitely arrive next year. I hope it does.

I am doubtful but let's assume that growth is now assured, does this really mean that, as David Smith said, all this has come without Osborne abandoning his austerity programme? In truth, the Chancellor made up his programme as he went along. Following his first Budget in 2010, he had to announce more austerity for the next Parliament in subsequent Budgets and Autumn Statements and he continually missed his own growth forecasts and borrowing targets. This consistent failure led him to abandon his austerity target to eliminate the structural deficit in this Parliament. The jury must be still out as to whether he will meet Labour's pre-Election plan to merely half it. This is particularly telling as he claimed that this was too slow and would mean that we were in danger of 'doing a Greece'.

But surely the biggest proof that Austerity as originally conceived has been abandoned was Osborne's panicked decision to embark on a massive programme of fiscal stimulus, because surely that is what Funding For Lending and moreover Help to Buy are? Under Help to Buy the Government is providing up to £120bn of taxpayer backed guarantees to reflate, some would say inflate, the UK property market. When the economist Larry Summers was asked about this he noted with a wry smile that one of the things you learn early on when you study finance is that when it comes to risk, the provision of a guarantee puts you in the same position as if you had borrowed the money yourself.

So what is clear is that if growth has returned it is in no small part due to the the Coalition performing a U-turn on both its original Austerity plan and its stance on Keynesian fiscal expansion. This begs the question: 'if you are willing to stimulate the economy using fiscal policy, what is the best and most productive way of doing it?' Those of us in local government have seen the Coalition government cut public subsidy to public housing by 60%, as part of their initial plans to cut us back to growth by slashing public sector capital spending and we have seen how this is drastically reducing the amount of social and affordable homes that developers can afford to build. They could have decided to restore this. At the very least they could have provided £120 bn worth of guarantees to underwrite additional borrowing for Council's and Housing Associations to build more home that people could afford to live in without the need for a public subsidy in the form of Housing Benefit. I think it is a mistake and a terrible shame that the government essentially has decided to cut a subsidy that built homes for the most needy and replaced it with a subsidy that enabled more private homes to be sold to the least credit worthy and most vulnerable borrowers.

I haven't said anything about the sustainability of our current 'recovery'. I'll save this for a later post. However, I thought that it was rather ironic that opposite David Smith's regular column in the ST's Business section entitled 'Growth up, deficit down – what's not to like?', the paper had decided to run a piece by Oliver Shah about fears that London's prime property market is a bubble ready to burst called 'POP GOES LONDON?'