How much does austerity hurt growth?

Paul Krugman gives a rough-and-ready model based on yesterday's Eurostat figures.

Paul Krugman uses the Eurostat figures on European debts and deficits to do a rough-and-ready calculation of the effects of austerity on GDP growth in the EU:

The measure of austerity on the graph above includes budgets reduced in real, not just nominal, terms. If GDP in a country rockets up, and the budget stays flat, Krugman attributes this to austerity in just the same way as how, in the UK, GDP has stayed flat as budgets have plummeted.

From this model, he infers that cutting budgets by 1 per cent of GDP reduces GDP by around 1.25 per cent.

There is then a feedback mechanism that kicks in (if GDP is reduced, then the deficit is reduced by less), all of which means that his model predicts that £1 of austerity reduces the deficit by £0.40.

None of this will come as a surprise to the economists working at the Office for Budget Responsibility, who have been struggling with just this effect for the last two years. A large part of the perennial downwards revisions of their predictions for GDP growth, and the upward revisions of their predictions for deficit reduction, will have been due to the stagnation in the UK economy since 2010 – stagnation which, if Krugman is to be believed, is due to the austerity the UK has experienced.

By now, at least, the OBR seem to have begun to include the correct amount of pessimism in their forecasts. The office's March 2012 prediction for the deficit (or public sector net borrowing, PSNB) for 2012/13 was spot on, at £126bn. This is a long way off the rather more optimistic prediction made following the chancellor's first budget in 2010, when the deficit was expected to be £10bn less by now. Whether the new predictions will hold we shall see, but even if they do, they require for another five years of harsh austerity to pull off.

Paul Krugman. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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New Digital Editor: Serena Kutchinsky

The New Statesman appoints Serena Kutchinsky as Digital Editor.

Serena Kutchinsky is to join the New Statesman as digital editor in September. She will lead the expansion of the New Statesman across a variety of digital platforms.

Serena has over a decade of experience working in digital media and is currently the digital editor of Newsweek Europe. Since she joined the title, traffic to the website has increased by almost 250 per cent. Previously, Serena was the digital editor of Prospect magazine and also the assistant digital editor of the Sunday Times - part of the team which launched the Sunday Times website and tablet editions.

Jason Cowley, New Statesman editor, said: “Serena joins us at a great time for the New Statesman, and, building on the excellent work of recent years, she has just the skills and experience we need to help lead the next stage of our expansion as a print-digital hybrid.”

Serena Kutchinsky said: “I am delighted to be joining the New Statesman team and to have the opportunity to drive forward its digital strategy. The website is already established as the home of free-thinking journalism online in the UK and I look forward to leading our expansion and growing the global readership of this historic title.

In June, the New Statesman website recorded record traffic figures when more than four million unique users read more than 27 million pages. The circulation of the weekly magazine is growing steadily and now stands at 33,400, the highest it has been since the early 1980s.