Applauding the return to economic growth is like celebrating the release of an innocent prisoner

Nobody doubted a return to growth under austerity was possible - but all the evidence suggests it has been hampered by George Osborne's radically anti-stimulus position.

The IMF’s growth forecast for the UK, which was revised upwards on 21 January, was met with relief, rather than joy: we have finally started to climb out of the worst slump in over 100 years. The Chancellor responded, saying that "Our long-term plan is delivering a brighter economic future."

Really? Below is the UK's real output per person since the crisis, compared with America. Whereas USGDP reached its pre-crisis peak in 2012, we don’t even show signs of reaching ours this decade.

Source: Eurostat for real GDP figures 2007-2012. 2013 forecasted using 2012 real GDP growth rates, also from Eurostat. Accessed 04/02/2013

However, let’s assume that the growth figures forecast by the IMF result in real growth of 2.4 per cent and 2.8 per cent for the UK and US, respectively, in 2014. The picture would certainly be brighter, as shown below.

Source: Same as above and IMF growth figures used to project for 2014. (Population growth not taken into account)

Assuming growth continues at this rate (the IMF predict it to fall next year), we would be back to 2007 levels of GDP by 2016-17. The US economy would, by that stage, be 11 per cent larger than it was in 2007. This is as much a cause for celebration as the release of a prisoner who has spent a wasted decade behind bars.

But the reaction in the mainstream press is that this “success” vindicates the chancellor’s economics and, by proxy, ridicules the shadow chancellor’s. The Economist, this week, said that Labour had been blasted on the economyand mocked Ed Balls's views, calling him a Good Keynesian”. Clearly The Economist thinks that using fiscal stimulus in the aftermath of the Great Recession would have been folly.

Firstly, they are wrong. Nobody suggested that growth would never return with austerity - but we would surely have seen growth years sooner if the government had stimulated demand. (For comparison, America’s stimulus package was almost a trillion dollars).

Secondly, the upturn in growth we are seeing now may actually be the product of an unexpected bout of fiscal stimulus in 2012 by none other than George Osborne. (Don’t believe me? I didn’t at first either...)

I’ll deal with these two points in turn. First, the case for fiscal stimulus. Faced with the task of driving a car up a steep hill, few people would focus on saving fuel. Or as John Maynard Keynes put it: The boom, not the slump, is the right time for austerity...” Now, to be fair, the forces that govern economies are not as well understood as the force of gravity on a car and, yes, economists are divided in many areas of macroeconomics - but the idea that you can create growth by imposing fiscal austerity on a recessionary economy is not one of those areas.

The graph below shows that those European countries who engaged in the most fiscal austerity over 2008-2012 had the biggest slumps.

Source: Krugman, P. “Night of the living Alesina”, NY Times Online; March 12th, 2013. European countries: GDP growth 2008-12 vs the size of their austerity programmes.

The idea that government belt-tightening during a recession causes a further contraction of GDP is as basic as it gets, but in post-2007 recessionary economies there was even more cause than usual to increase government spending. Firstly, normal monetary policy became impotent after we reached 0 per cent interest rates - and while quantitative easing has helped, its possible repercussions are not yet fully understood.

Secondly, multipliers have been shown (by the IMF, among others) to be higher when economies are depressed - so each pound spent by government generates more than just one pound of output - by some estimates, more than £2.50. Thirdly, and perhaps most importantly, countercyclical spending helps to maintain normal levels of output and therefore jobs: this not only decreases human misery, but it prevents the de-skilling of the labour force. In the long run this means higher employment and tax revenues, lower welfare and deficits, and a higher potential GDP.

As an aside, this is one of the biggest conundrums in right-wing economics: free-marketeers believe that growth is determined primarily by the supply side: so they want, for example, to cut red tape and taxes so that companies can more easily create jobs. But they are happy to watch unemployment rise and a substantial proportion of the labour market become deskilled and devalued - making those companies less able to find talent at home. And when those companies turn instead to foreign labour markets? No! Send the immigrants home!

But back to Mr Osborne. The government’s two main theories for shirking Economics 101 - that austerity could actually be expansionary and that debt over 90 per cent would cause investors to think of Britain as equivalent to Zimbabwe - have been proven beyond all reasonable doubt to be based on poppycock. Yet the coalition has remained firmly, publicly committed to austerity. As recently as November 2013, David Cameron told the CBIWe have to continue with Plan A. We have to continue to reduce the deficit.

Indeed, over the past three and a half years, every soundbite we have heard from the government would lead us to believe that Plan A has been motoring on ruthlessly through schools, councils and government departments, oblivious to any potential harm it might cause, like a sort of necessary Evil Kinevil. Not so.

Last summer, I wrote that fiscal austerity had so far been self-defeating as proven by the latest projections, which showed a budget deficit refusing to budge:

Public sector net borrowing excluding the Royal Mail and Asset Purchase Facility transfers. Source: OBR Economic and Fiscal Outlook, December 2013. Light blue=forecast.

My reasoning at the time was that austerity was self-defeating via the automatic stabilisers route: cutting public services in a recession worsens unemployment, which means more people on benefits and lower total tax revenues - so the deficit balloons. This mechanism is even more pronounced when the private sector is engaging in massive hoarding and is unwilling to hire, as we have seen in the past few years

But by breaking down the deficit figures further, it is clear that something else has been going on.

The top red and blue lines are the budget deficit as a percentage of GDP (normal and cyclically adjusted). It is clear that the pace of reduction stalled in 2012, slightly increased last year and is forecast to continue increasing slowly towards 0 per cent - but it is impossible to tell what is causing the reductions.

The green line at the bottom, however, is a measure of total government consumption of goods and services as a percentage of GDP. This measure strips out the automatic stabilisers” - tax and transfers - and is, therefore, a better measure of discretionary government spending - it is, essentially, George Osborne’s signature.

For a chancellor committed to plan A this is a fairly sizeable deviation, but it is a deviation of his own making. And yet while this anomaly has been well documented in the economics blogosphere (see here, here or here), it simply hasn’t made it into the mainstream press.

If a football team won the Premier League on a small budget, they would be well praised. If it was then discovered that they had actually spent a fortune on the sly, it would be front page news.

Instead, we have the FT writing articles with titles such as “Osborne wins the battle on austerity” - and worse, polls showing that more people now think cuts are good, rather than bad for the economy.

To be fair, it is impossible to say for certain that the return of growth was due to a year of increased stimulus (though any basic economics text will tell you that fiscal stimulus takes about 12-18 months to kick in), but that doesn’t explain the strange fact that there was a year of stimulus under an outwardly parsimonious Chancellor. And it begs the question: does George Osborne believe in austerity or not?

If the plan was to create growth two years before an election, while outwardly claiming that this was the result of ongoing austerity under a wise economic custodian, then the political rationale is clear. But if that is the case, then George Osborne has tacitly acknowledged the effectiveness of fiscal stimulus to create growth.

Does George Osborne have full faith in austerity? Photograph: Getty Images.

Dom Boyle is a British economist.

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Find the EU renegotiation demands dull? Me too – but they are important

It's an old trick: smother anything in enough jargon and you can avoid being held accountable for it.

I don’t know about you, but I found the details of Britain’s European Union renegotiation demands quite hard to read. Literally. My eye kept gliding past them, in an endless quest for something more interesting in the paragraph ahead. It was as if the word “subsidiarity” had been smeared in grease. I haven’t felt tedium quite like this since I read The Lord of the Rings and found I slid straight past anything written in italics, reasoning that it was probably another interminable Elvish poem. (“The wind was in his flowing hair/The foam about him shone;/Afar they saw him strong and fair/Go riding like a swan.”)

Anyone who writes about politics encounters this; I call it Subclause Syndrome. Smother anything in enough jargon, whirr enough footnotes into the air, and you have a very effective shield for protecting yourself from accountability – better even than gutting the Freedom of Information laws, although the government seems quite keen on that, too. No wonder so much of our political conversation ends up being about personality: if we can’t hope to master all the technicalities, the next best thing is to trust the person to whom we have delegated that job.

Anyway, after 15 cups of coffee, three ice-bucket challenges and a bottle of poppers I borrowed from a Tory MP, I finally made it through. I didn’t feel much more enlightened, though, because there were notable omissions – no mention, thankfully, of rolling back employment protections – and elsewhere there was a touching faith in the power of adding “language” to official documents.

One thing did stand out, however. For months, we have been told that it is a terrible problem that migrants from Europe are sending child benefit to their families back home. In future, the amount that can be claimed will start at zero and it will reach full whack only after four years of working in Britain. Even better, to reduce the alleged “pull factor” of our generous in-work benefits regime, the child benefit rate will be paid on a ratio calculated according to average wages in the home country.

What a waste of time. At the moment, only £30m in child benefit is sent out of the country each year: quite a large sum if you’re doing a whip round for a retirement gift for a colleague, but basically a rounding error in the Department for Work and Pensions budget.

Only 20,000 workers, and 34,000 children, are involved. And yet, apparently, this makes it worth introducing 28 different rates of child benefit to be administered by the DWP. We are given to understand that Iain Duncan Smith thinks this is barmy – and this is a man optimistic enough about his department’s computer systems to predict in 2013 that 4.46 million people would be claiming Universal Credit by now*.

David Cameron’s renegotiation package was comprised exclusively of what Doctor Who fans call handwavium – a magic substance with no obvious physical attributes, which nonetheless helpfully advances the plot. In this case, the renegotiation covers up the fact that the Prime Minister always wanted to argue to stay in Europe, but needed a handy fig leaf to do so.

Brace yourself for a sentence you might not read again in the New Statesman, but this makes me feel sorry for Chris Grayling. He and other Outers in the cabinet have to wait at least two weeks for Cameron to get the demands signed off; all the while, Cameron can subtly make the case for staying in Europe, while they are bound to keep quiet because of collective responsibility.

When that stricture lifts, the high-ranking Eurosceptics will at last be free to make the case they have been sitting on for years. I have three strong beliefs about what will happen next. First, that everyone confidently predicting a paralysing civil war in the Tory ranks is doing so more in hope than expectation. Some on the left feel that if Labour is going to be divided over Trident, it is only fair that the Tories be split down the middle, too. They forget that power, and patronage, are strong solvents: there has already been much muttering about low-level blackmail from the high command, with MPs warned about the dire influence of disloyalty on their career prospects.

Second, the Europe campaign will feature large doses of both sides solemnly advising the other that they need to make “a positive case”. This will be roundly ignored. The Remain team will run a fear campaign based on job losses, access to the single market and “losing our seat at the table”; Leave will run a fear campaign based on the steady advance of whatever collective noun for migrants sounds just the right side of racist. (Current favourite: “hordes”.)

Third, the number of Britons making a decision based on a complete understanding of the renegotiation, and the future terms of our membership, will be vanishingly small. It is simply impossible to read about subsidiarity for more than an hour without lapsing into a coma.

Yet, funnily enough, this isn’t necessarily a bad thing. Just as the absurd complexity of policy frees us to talk instead about character, so the onset of Subclause Syndrome in the EU debate will allow us to ask ourselves a more profound, defining question: what kind of country do we want Britain to be? Polling suggests that very few of us see ourselves as “European” rather than Scottish, or British, but are we a country that feels open and looks outwards, or one that thinks this is the best it’s going to get, and we need to protect what we have? That’s more vital than any subclause. l

* For those of you keeping score at home, Universal Credit is now allegedly going to be implemented by 2021. Incidentally, George Osborne has recently discovered that it’s a great source of handwavium; tax credit cuts have been postponed because UC will render such huge savings that they aren’t needed.

Helen Lewis is deputy editor of the New Statesman. She has presented BBC Radio 4’s Week in Westminster and is a regular panellist on BBC1’s Sunday Politics.

This article first appeared in the 11 February 2016 issue of the New Statesman, The legacy of Europe's worst battle