The truth about cuts and austerity

Your wish is Osborne’s command…

Economics editor Larry Elliott spouts far less drivel than most Guardian hacks but he put in a solid effort this week. Responding to the announcement that ratings agency Moody’s had put Britain on negative outlook Elliott wrote that Shadow Chancellor Ed Balls “has now been vindicated”

It might seem odd, as governments around Europe totter under the weight of their debts, that Elliott might consider Balls, a man whose sole economic idea in any situation is to borrow money and spend it, to be anything other than utterly deluded.

Elliott bases his bizarre claim on the Moody’s report blaming the shift to a negative outlook on a “weaker macroeconomic environment, which will challenge the government’s efforts to place its debt burden on a downward trajectory over the coming years” This, in Elliott’s eyes, is down to Chancellor George Osborne cutting spending “too far too fast” against the advice of Balls.

This is an outrageous case of picking the facts that suit. Moody’s report actually gives the reasons for the change and they list “The increased uncertainty regarding the pace of fiscal consolidation in the UK due to materially weaker growth prospects over the next few years” and “the high risk of further shocks (economic, financial, or political) within the (European) currency union”

Balls and Elliott would argue that these “materially weaker growth prospects” are a result of government spending cuts. They would be wrong. They are the obvious result of an economy buoyed on debt having to readjust its spending to something more sustainable. Moody’s itself list the challenges as “reflecting the combined effect of a commodity price driven hit to real incomes, the confidence shock from the euro area and a reassessment of the lasting effects of the financial crisis on potential output”

And Moody’s hammer a final nail into Elliott and Balls’ coffin saying that “reduced political commitment to fiscal consolidation, including discretionary fiscal loosening”, following Balls’ advice, could prompt a downgrade. So much for vindication.

But then the coalition’s attempts to get Britain’s ruinous borrowing under control are proving a rich source of hysteria. They prompt otherwise intelligent people to make nonsensical, easily refutable arguments that spending cuts are wrecking our economy and plunging us into some Dickensian dark age. Worse, these obviously erroneous things are said with such zealous, wild eyed passion that the terrifying prospect presents itself that these people actually believe them.

These arguments don’t survive even a brief encounter with some figures. In Labour’s last year in office government spending was £660.6 billion. In the fiscal year ending in April 2011, the coalition’s first in office, government spending came in at £683.4 billion. On current projections when the government closes the books on this fiscal year in April it will record spending of £703.4 billion.

This upward trend in government spending is projected to continue. In the fiscal year ending in April 2015 the government is currently projected to spend £760.5 billion.

We have nominal rises in government spending every single year. But what does inflation do to this?

The table below shows the percentage increase in government spending each year, inflation (actual and predicted) for each year, and the effect this has on the percentage increase in nominal spending.

 

% increase in nominal spending on previous year Inflation Difference
2010 6.3 2.4 3.9
2011 3.4 4.9 -1.5
2012 2.9 4.6* -1.7
2013 2.7 2** 0.7
2014 2.5 2** 0.5
2015 2.7 2** 0.7

 

* Estimate based on figures for May 2011 to January 2012

**Estimate based on Bank of England projections

Only in two years, 2011 and 2012, do we see the ravages of inflation outweighing the effect of the nominal spending rises to produce real cuts in government spending. And any private sector enterprise could make the cuts we do see, 1.5 percent and 1.7 percent, simply by switching to cheaper toilet paper. Anyone who thinks that these cuts are either wrecking the economy or destroying the social fabric of the nation needs to find a dark room and stay there for a while.

Strangely enough these hysterics might actually be helping George Osborne. The only reason Britain with its Greek sized deficits has German level interest rates is because Osborne promises to get rid of the deficits. The low rates the Treasury can borrow at are, we are told, a reward for fiscal discipline.

But how long would these low interest rates last if the impression got about that Osborne isn’t actually cutting spending very much? The sound and fury omitted by those opposed to deficit reduction might actually be having the effect of making Osborne’s austerity appear tougher than it really is. The reward has been Osborne’s; those low interest rates which have kept a PIIGS style crisis at bay.

This is the truth about the so-called cuts and austerity: there isn’t much of it going on despite what Larry Elliott and others say. Just don’t let the bond markets find out.

This article originally appeared at The Commentator

Meet the new boss in Ireland

It would be hard to imagine a more rancid collection of chisellers running a developed nation than the Fianna Fáil government which ran Ireland until a year ago. They were involved in corruption scandal after corruption scandal. And when Irish banks which had gambled on property (and donated to Fianna Fáil) got into trouble in 2008, Fianna Fáil, in a locked room, late at night and probably over a couple of drinks, guaranteed not only their deposits but the investments of their bondholders. The Irish public was put on the hook for billions of euros of bad investments. With one or two noble exceptions Fianna Fáil were, as a Dublin friend of mine put it, “Greedy, unprincipled gobshites”

In February 2011 the bums were kicked out. Fianna Fáil lost 24% of their vote and over 50 seats in the Dáil Éireann. They finished in third place and a coalition of Fine Gael and Labour swept into office with a record majority.

But what was any of it for? In what way was Ireland or its political life different after 2.2 million Irish men and women voted?

One of the most craven aspects of the Fianna Fáil government was its slavish obsequiousness towards the European Union. A party which claimed to be heirs to the nationalist spirit which is such a key part of the foundational myths of the Irish Republic, they gave Brussels whatever it asked for.

In June 2001 the Nice Treaty was put before the Irish people in a referendum. They rejected it. In the EU, votes and referendums don’t exist to discover the will of the people but simply to rubber stamp whatever decision the political elites have already taken. So the EU told the Irish to vote again and the gutless lackeys in Fianna Fáil facilitated it. The Nice Treaty passed at the second time of asking in 2002.

But Ireland’s constitutional requirement to put major changes to the Constitution to the vote remained. In 2008 the Lisbon Treaty was put before the Irish people and they rejected it. Again, the EU elites were dismayed that the people had given the wrong answer and Fianna Fáil was ordered to hold another referendum. The Lisbon Treaty passed at the second time of asking in 2009.

But any notion the Irish might have had that this supplication to a foreign power had ended with Fianna Fáil government has lately been rudely disabused.

The momentum behind the collapse of the Euro has proved less responsive to EU elite diktat than EU member governments. The latest useless attempt to stop it is the proposed ‘Treaty establishing the European Stability Mechanism’. In effect, this is simply a beefed up version of the old widely ignored and selectively enforced Stability & Growth Pact.

But in Brussels the Irish voters, unlike their politicians, have a reputation for thinking for themselves won in those two brief EU rejections. This makes giving them a say very dangerous, so the EU is looking at ways it can avoid doing so.

And, disgracefully, the Fine Gael government is proving every bit as accommodating as Fianna Fáil ever was. Enda Kenny’s government believes that, legally, they can just about get away with the argument that the new treaty does not represent a large enough change to the Irish Constitution to necessitate a referendum. But there’s not much in it, the government is rehearsing its arguments for the eventuality that they are challenged on this point in court.

That’s how democracy works between the EU and Ireland. The EU and its servants in the Dáil either give the Irish people too many votes or none at all.

Ireland is not the only country whose political class is acting on the bidding of Brussels rather than its people. The new EU imposed Italian government contains no elected officials and the Germans want the EU to take control of Greek fiscal policy away from the Greek government.

This represents a real danger for Europe. How long will the peoples of European nations tolerate a situation where, whoever they vote for, they end up being run by the EU? Democracy is never more vulnerable then when it is seen to be dysfunctional.

For their part the Irish might have expected rather different treatment after handing Fine Gael a landslide last year. But that’s democracy in the EU for you. It was never better described than by The Who ; “Meet the new boss, same as the old boss”

This article originally appeared at openDemocracy