You are here:   Economics > The Keynesian Versus The Monetarist: A Lost Decade
 
Seventh, the recovery began when it did at least partly because structural (or cyclically-adjusted) fiscal tightening slowed dramatically. The IMF shows a tightening in the structural general government financial deficit from 8.4 per cent of GDP in 2010 to 3.8 per cent in 2013. The structural deficit is then estimated at 4.1 per cent in 2014 and forecast at 3.6 per cent in 2015. GDP grew by just 1.6 per cent in 2011, 0.7 per cent in 2012 and 1.7 per cent in 2013, while the structural deficit was being slashed. Then, in 2014, it picked up, to 2.6 per cent, as the structural tightening slowed, as I would have expected.

Eighth, the government did not deliver the elimination of the structural deficit within one parliament it promised, as Mr Congdon himself notes. Back in June 2010, the OBR forecast that cyclically-adjusted net borrowing would fall from 8.7 per cent of GDP in 2009-10 to 0.8 per cent of GDP in 2014-15. The latest forecast is for cyclically-adjusted net borrowing of as much as 4.2 per cent of GDP in 2014-15.

Finally, the economy would not have been "wrecked" if the government had not promised the austerity it ended up only very partially delivering. We know that, because long-term interest rates are today extraordinarily low, despite the failure of the government to deliver its promises, as shown in the huge overshoot of public net debt (now expected to peak at 81 per cent of GDP in 2015-16, far above the 70 per cent in 2013-14 forecast in June 2010), and despite the uncertainty about policies after the next election.

Mr Congdon's arguments do not stand up. A different path, with tax raises postponed until the recovery was well-established and a bigger programme of public investment, would not only have been perfectly safe, but would have given the economy a substantially stronger recovery. What the UK has experienced, instead, is a poor recovery, though the remarkable stagnation in labour productivity ameliorated the adverse impact on the welfare of the population.

Moreover, to his credit, Mr Osborne displayed appropriate flexibility when it became obvious he could not achieve his goal for the structural fiscal deficit at reasonable cost. Flexibility in response to experience is a virtue. Mr Congdon should try it.
View Full Article
 
Share/Save
 
 
 
 

Post your comment

CAPTCHA
This question is for testing whether you are a human visitor and to prevent automated spam submissions.