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.

Ukip's Nigel Farage and Paul Nuttall. Photo: Getty
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Is the general election 2017 the end of Ukip?

Ukip led the way to Brexit, but now the party is on less than 10 per cent in the polls. 

Ukip could be finished. Ukip has only ever had two MPs, but it held an outside influence on politics: without it, we’d probably never have had the EU referendum. But Brexit has turned Ukip into a single-issue party without an issue. Ukip’s sole remaining MP, Douglas Carswell, left the party in March 2017, and told Sky News’ Adam Boulton that there was “no point” to the party anymore. 

Not everyone in Ukip has given up, though: Nigel Farage told Peston on Sunday that Ukip “will survive”, and current leader Paul Nuttall will be contesting a seat this year. But Ukip is standing in fewer constituencies than last time thanks to a shortage of both money and people. Who benefits if Ukip is finished? It’s likely to be the Tories. 

Is Ukip finished? 

What are Ukip's poll ratings?

Ukip’s poll ratings peaked in June 2016 at 16 per cent. Since the leave campaign’s success, that has steadily declined so that Ukip is going into the 2017 general election on 4 per cent, according to the latest polls. If the polls can be trusted, that’s a serious collapse.

Can Ukip get anymore MPs?

In the 2015 general election Ukip contested nearly every seat and got 13 per cent of the vote, making it the third biggest party (although is only returned one MP). Now Ukip is reportedly struggling to find candidates and could stand in as few as 100 seats. Ukip leader Paul Nuttall will stand in Boston and Skegness, but both ex-leader Nigel Farage and donor Arron Banks have ruled themselves out of running this time.

How many members does Ukip have?

Ukip’s membership declined from 45,994 at the 2015 general election to 39,000 in 2016. That’s a worrying sign for any political party, which relies on grassroots memberships to put in the campaigning legwork.

What does Ukip's decline mean for Labour and the Conservatives? 

The rise of Ukip took votes from both the Conservatives and Labour, with a nationalist message that appealed to disaffected voters from both right and left. But the decline of Ukip only seems to be helping the Conservatives. Stephen Bush has written about how in Wales voting Ukip seems to have been a gateway drug for traditional Labour voters who are now backing the mainstream right; so the voters Ukip took from the Conservatives are reverting to the Conservatives, and the ones they took from Labour are transferring to the Conservatives too.

Ukip might be finished as an electoral force, but its influence on the rest of British politics will be felt for many years yet. 

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