current affairs economics

100 years of blundering experimentation

With all the panic around government spending in recent months, you’d think it had ballooned to some kind of historic high under Labour. So what would you guess the government was spending, as a percentage of GDP? And how do you think it compares to past decades?

The answer may surprise some people: it’s almost exactly what it was 60 years ago. Government spending has risen year on year since 1949, but since the economy has grown too, the percentages have stayed roughly the same.

It’s a rather overlooked macroeconomic fact from Victoria Chick and Ann Pettifor’s briefing paper The Economic Consequences of Mr Osborne (pdf).

We’re in a period of fiscal consolidation at the moment, with government departments ordered to find savings of up to 40%, a major budgetary slimming exercise. The idea is to reduce the deficit, bring public debt under control and create a more stable platform for future growth. In so doing, says Ann Pettifor, we’re probably not paying nearly enough attention to economic history. Over the past century, there have been periods of both expansion and retraction. Comparing each of these and unpacking its consequences for public debt, GDP growth, unemployment and interest rates seems like a pretty good idea.

I hope Osborne reads the briefing, because “the empirical evidence runs exactly counter to conventional thinking,” according to the authors. “Fiscal consolidation increases rather than reduces the level of public debt as a share of GDP and is in general associated with adverse macroeconomic conditions.”

As an example, the UK government’s response to the rocky conditions of the early 30s was to reduce the budget by 10%. This caused public debt to rise from 173 to 183% of GDP, while GDP fell. A change of policy in 1934 saw government spending blossom from 12% of GDP to the levels we see today. Very different circumstances, to be sure, but an interesting comparison.

The election debates saw two clear camps emerge on the deficit. Gordon Brown repeated the need to ‘secure the recovery’ until he was blue in the face, while David Cameron called for swift and significant cuts. We opted for the cuts, and in so doing we’ve turned our backs on 60 years of Keynesian economics. I’m not entirely sure what drives the new approach, but George Osborne may have given us a clue in his budget speech when he claimed that “early, determined action has earned us credibility in international markets.”

Is the government wrong to abandon spending and woo the markets? I have no idea. Looking at the last century of economics, it looks to me like 100 years of blundering experimentation.

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