Osborne's Lack of Austerity
Crisis: Greek anti-austerity protests in Athens, 2011 (photo: Kotsolis)
Should George Osborne worry about the national debt? When the coalition government came to power in May 2010, the Greek financial crisis was in everyone's minds. For some years after the introduction of the euro, Greece had run a budget deficit and incurred a large national debt not much less than gross domestic product. With an interest rate of about 5 per cent, the annual interest cost was roughly 5 per cent of GDP: rather high, but manageable.
However, in 2009 and 2010 the Greek government admitted that it had been telling lies about both its deficit and debt numbers, and that the debt was nearer 120 per cent of GDP. Financial confidence was lost.
Investors sold government bonds and pushed up the yield into the low double digits. So the interest cost — with, say, a 12 per cent rate on a debt of 120 per cent of GDP — might approach 15 per cent of GDP. Because of the leap in the interest charge, and fears of riots, the government could not bring its deficit under control. Greece was bust. In 2012 the debt/GDP ratio soared to 170 per cent and the bond yield exceeded 30 per cent for a few months.
The Greek problem arose partly from the difficulty of controlling the non-interest deficit, but more fundamentally from the wild gyrations in interest rates as financial market confidence ebbed and flowed with the stream of official mendacities. The lesson was not lost on Cameron, Osborne and Clegg as they hammered out the coalition agreement. A priority was to ensure that the UK's own budget deficit — a shocking 11 per cent of GDP in 2009 — was brought down to a more respectable and sustainable level. If not, the markets might punish Britain in the same way they had punished Greece.
The 2014 Autumn Statement is behind us. As commentators start to think about the next government's fiscal plans, it is a good time for stocktaking. Osborne took a lot of stick from Keynesian economists in 2011 and 2012 about his commitment to curb the budget deficit and to enforce "austerity" in public spending. Amazingly, the Keynesians continued to urge "fiscal expansion" just as the unfolding Greek disaster ought to have served as warning against another public expenditure extravaganza of the type seen in the last two-thirds of the Blair/Brown government.