Austerity's definitely happened. The question is how much damage it's done

The fact that austerity has failed does not mean no-one tried to implement it.

The Atlantic's Matthew O'Brien writes:

Britain's economy is a riddle wrapped in a mystery inside an enigma, but this much is clear: it's a disaster. After its Olympics-fueled growth, such as it was, lifted it out of recession in the third quarter of 2012, Britain might be headed back after its economy fell 0.3 percent at the end of the year the fourth time in five quarters its GDP has contracted. Britain's now verging on a triple-dip recession, which is just another way of saying a depression…

It's no accident this era of zero growth has coincided with an era of austerity. Despite entering office with borrowing costs at 50-year lows, the Cameron coalition decided the government deficit, and not the growth deficit, was the chief threat to future prosperity. It raised taxes and cut the growth of spending, but did so with little regard for what constituted smart cuts and what did not… It's the economic equivalent of shooting yourself in both feet, just in case shooting yourself in one doesn't completely cripple you.

O'Brien goes on to argue that austerity can't be the only cause of Britain's slump. For him, the real puzzle is the collapse in productivity which has lead to a recovery in the labour market (of sorts) without a commensurate recovery in GDP. (That disconnect may partially be the result of some statistical fiddling on the part of the Government).

There's a number of possibilities for such an "enigma", from zombie firms which are only kept alive by the low cost of credit, through measurement error (both that mentioned above and something gone awry with the seasonal adjustments), to genuine slumps — temporary or otherwise — in productivity.

But one group of people think they have the answer to O'Brien's puzzle, albeit by discounting one of his premises. These are the "cut further, cut faster" Tories, for whom a failure to reduce the deficit as quickly as they desire is the same as a failure to implement austerity.

NIESR's director Jonathan Portes has taken on this tendency, in the form of a detailed response to two of its biggest proponents, Tory MP John Redwood and the Spectator's editor Fraser Nelson.

Nelson writes:

We’re witnessing the difficulty the left has in reconciling its official narrative with what’s actually happening. Yes, George Osborne’s policy is not working – but for reasons that the Guardian can’t quite bring itself to accept. It’s not that his evil cuts are retarding the recovery. It’s that he’s slowly abandoning his deficit plan. The figures show that core government spending is going up, along with the debt and (last month) the deficit.

Portes responds that yes, core government spending "is roughly flat in real terms, with cuts in some areas offset by the operation of the automatic stabilisers". But defining austerity in terms of core government spending is arguing at cross-purposes with those who argue that austerity has harmed the British economy.

The simple analysis of the government's austerity program is that the reduction of the deficit is equivalent to austerity. That was the initial definition the government went with, which is why the failure to reduce the deficit to any great degree is seen as failing on its own terms.

But deficit reduction can't be directly equivalent to austerity, since it can also be achieved by growth. (Which is the argument the anti-cuts left has been making consistently for the last three years.) And so we get to the circular argument in Nelson's claim that Osborne has failed at austerity. Because what he is describing as the failure to achieve austerity — slow paced deficit reduction and flat spending — is actually a symptom of the failure of austerity. As Portes writes, the causal inference is wrong. It's not that the Chancellor is abandoning austerity and so the debt continues to rise; it's that debt continues to rise because austerity doesn't work to reduce it, and so the Chancellor is trying to quietly change tack:

The government did not adopt policy changes which led to slower deficit reduction. Instead, the front-loaded fiscal consolidation illustrated above (along with other factors, such as the similar, and similarly misguided, policies pursued by our eurozone partners) derailed the recovery, which in turn led to the slowing of deficit reduction, which in turn has forced the government to abandon its fiscal framework. Again, the IMF sets all this out quite clearly.

For Portes, the important failure of austerity is in the resulting reduction in capital investment, because austerity stands opposed to fiscal stimulus (which he defines as "Government measures, normally involving increased public spending and lower taxation, aimed at giving a positive jolt to economic activity").

The Government, in its desire to cut the deficit primarily through spending cuts with a top-up of tax rises, thus failed to achieve one of its goals. Spending was not cut significantly, but between tax rises and initial moderate growth, the deficit has been reduced. This is the austerity which is decried. The fact that one of the measures through which this was intended to be achieved is not proof that there has been no austerity, but merely further proof that austerity is self-defeating.

And by focusing on attempts to reduce spending and achieve "fiscal consolidation", the government failed to implement fiscal stimulus (even going so far as to reduce public investment by 1.7 per cent of GDP).

The failure of austerity to greatly reduce the deficit, and the fact that automatic stabilisers mean that spending stubbornly refuses to fall — as we swap a pound spent on EMA for a teenager in school with a pound spent on JSA for an unemployed civil servant — are not the same as a failure to implement austerity. It has been implemented, and it has damaged the nation: the question now under discussion is just how much.

George Osborne looking at wheels. 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.

Photo: Getty Images
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There are risks as well as opportunities ahead for George Osborne

The Chancellor is in a tight spot, but expect his political wiles to be on full display, says Spencer Thompson.

The most significant fiscal event of this parliament will take place in late November, when the Chancellor presents the spending review setting out his plans for funding government departments over the next four years. This week, across Whitehall and up and down the country, ministers, lobbyists, advocacy groups and town halls are busily finalising their pitches ahead of Friday’s deadline for submissions to the review

It is difficult to overstate the challenge faced by the Chancellor. Under his current spending forecast and planned protections for the NHS, schools, defence and international aid spending, other areas of government will need to be cut by 16.4 per cent in real terms between 2015/16 and 2019/20. Focusing on services spending outside of protected areas, the cumulative cut will reach 26.5 per cent. Despite this, the Chancellor nonetheless has significant room for manoeuvre.

Firstly, under plans unveiled at the budget, the government intends to expand capital investment significantly in both 2018-19 and 2019-20. Over the last parliament capital spending was cut by around a quarter, but between now and 2019-20 it will grow by almost 20 per cent. How this growth in spending should be distributed across departments and between investment projects should be at the heart of the spending review.

In a paper published on Monday, we highlighted three urgent priorities for any additional capital spending: re-balancing transport investment away from London and the greater South East towards the North of England, a £2bn per year boost in public spending on housebuilding, and £1bn of extra investment per year in energy efficiency improvements for fuel-poor households.

Secondly, despite the tough fiscal environment, the Chancellor has the scope to fund a range of areas of policy in dire need of extra resources. These include social care, where rising costs at a time of falling resources are set to generate a severe funding squeeze for local government, 16-19 education, where many 6th-form and FE colleges are at risk of great financial difficulty, and funding a guaranteed paid job for young people in long-term unemployment. Our paper suggests a range of options for how to put these and other areas of policy on a sustainable funding footing.

There is a political angle to this as well. The Conservatives are keen to be seen as a party representing all working people, as shown by the "blue-collar Conservatism" agenda. In addition, the spending review offers the Conservative party the opportunity to return to ‘Compassionate Conservatism’ as a going concern.  If they are truly serious about being seen in this light, this should be reflected in a social investment agenda pursued through the spending review that promotes employment and secures a future for public services outside the NHS and schools.

This will come at a cost, however. In our paper, we show how the Chancellor could fund our package of proposed policies without increasing the pain on other areas of government, while remaining consistent with the government’s fiscal rules that require him to reach a surplus on overall government borrowing by 2019-20. We do not agree that the Government needs to reach a surplus in that year. But given this target wont be scrapped ahead of the spending review, we suggest that he should target a slightly lower surplus in 2019/20 of £7bn, with the deficit the year before being £2bn higher. In addition, we propose several revenue-raising measures in line with recent government tax policy that together would unlock an additional £5bn of resource for government departments.

Make no mistake, this will be a tough settlement for government departments and for public services. But the Chancellor does have a range of options open as he plans the upcoming spending review. Expect his reputation as a highly political Chancellor to be on full display.

Spencer Thompson is economic analyst at IPPR