What Osborne won't admit: growth has increased because of slower cuts

The Chancellor's claim that "the pace of fiscal consolidation has not changed" is not supported by any of the available data.

Many others – perhaps Fraser Nelson does it best – have poked fun at the most Panglossian elements of the Chancellor’s speech on Monday. But I’d like here to address the substantive arguments he makes about what the path of the UK economy over recent years says about the impact of fiscal policy on growth.

The Chancellor doesn’t deny that growth has been much weaker than forecast, although it’s worth repeating the scale of this underperformance. In June 2010, the Office of Budget Responsibility predicted that by now the economy would be about 7 per cent larger, driven by a sharp rise in business investment and exports, while the deficit would have fallen by two-thirds. What has actually happened? In fact, GDP has grown at less than a third of that rate, business investment has fallen, and the path of deficit reduction bears no resemblance at all to the original projections (which is, as I'll elaborate below, a good thing).    

But, the Chancellor argues, this underperformance has nothing to do with fiscal policy:

the composition and timing of the slowdown in GDP growth relative to forecast is better explained by external inflation shocks, the eurozone crisis and the ongoing impact of the financial crisis on financial conditions. 

The Chancellor claimed his analysis was supported by many "independent economists" - although, oddly, he failed to mention the IMF, which has been the most prominent independent organisation to argue the contrary. Of course, the IMF and those of us who thought the fiscal consolidation plan was too aggressive never denied that these other factors played a par (and that their reversal will indeed help boost recovery).  As I put it here:

it now seems clear that the negative impact of ‘Plan A’ on growth has been significantly greater than expected, although matters have also been exacerbated by even more damaging policy mistakes in the eurozone, as well as high commodity prices.

Coincidentally, on the same day the Chancellor made his speech, other "independent economists" (Oscar Jorda and Alan Taylor) published a widely reported paper suggesting precisely the opposite (an earlier, non-technical summary is here). They find, as shown in their chart:

Without austerity, UK real output would now be steadily climbing above its 2007 peak, rather than being stuck 2% below. 

And they conclude:

Fiscal contraction prolongs the pain when the state of the economy is weak, much less so when the economy is strong....Keynes is still right, after all: “The boom, not the slump, is the right time for austerity at the Treasury.

However, despite the weight of academic research, the Chancellor goes on to claim that current developments support his interpretation of recent past history:

Proponents of the ‘fiscalist’ story cannot explain why the UK recovery has strengthened rapidly over the last six months. The pace of fiscal consolidation has not changed, government spending cuts have continued as planned, and yet growth has accelerated and many of the leading economic indicators show activity rising faster than at any time since the 1990s.

But this is an obvious sleight of hand.  The claim that "the pace of fiscal consolidation has not changed" is not supported by any of the available data. Here is the OBR’s own chart. As Robert Chote, the OBR’s Chair puts it, "deficit reduction appears to have stalled".

Indeed, the OECD, the government’s favourite of the international forecasting bodies (since, as noted above, the IMF shares my interpretation of the impact of fiscal consolidation on growth) goes even further. According to its calculations, the UK is actually expanding its structural deficit in 2013. In other words, the government is engaging in fiscal stimulus.  Personally I find this implausible - the OBR's estimate is that the structural deficit was broadly flat in 2012-13 - but the data hardly seem consistent with the Chancellor's view.

How did this happen? As I explained earlier this year:

So what's going on? As I noted earlier, most of the deficit reduction has come from cutting public sector net investment (spending on schools, roads, hospitals, etc) roughly in half. Pretty much all the rest came from tax increases (note that the investment cuts and tax increases were both, to a significant extent, policies inherited from the previous government). And we can see when it happened - between 2009-10 and 2011-12.

But these sources of deficit reduction stopped in 2011-12, because the government belatedly realised that cutting investment was a major mistake and that the economic imperative was actually to do precisely the opposite (not that there was much investment left to cut); and it stopped putting up taxes overall. So we can see also what's happened since - with the impact of the weak economy on tax receipts reducing revenues, the deficit has been flat and is projected to stay flat.

So the Chancellor’s argument is simply a non sequitur, supported neither by the research evidence nor the data. 

As I wrote here at the turn of the year, we should give the government credit for not digging us further into a hole by trying to stick to its original plans. Fiscal consolidation has slowed, at least for the time being, and as a consequence it is playing a considerably smaller role in driving economic developments than it did two years ago. Meanwhile, the eurozone and global environment is, at least at present, considerably more favourable. Poor policy and bad luck has delayed recovery, relative to NIESR's original forecasts and everyone else's, but has not removed the ability of the UK economy to generate growth. 

So it is perfectly reasonable to ask economic forecasters (including both the OBR and us at NIESR) why we appear so far to have underpredicted the strength of the current upturn. But claiming that this improvement vindicates the earlier damaging mistake the government made by going for front-loaded fiscal consolidation in 2010 just doesn’t make any economic sense. 

George Osborne makes a speech on the economy at a construction site in east London. Photograph: Getty Images.

Jonathan Portes is director of the National Institute of Economic and Social Research and former chief economist at the Cabinet Office.

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“We don’t BeLiviu”: how Romania is rising against corruption

Night after night, activists gather in Victory Square to demand the resignation of the government.

For much of the year, the large tarmac square in front of the main government building in Bucharest is little more than a glorified roundabout, busy with traffic and surrounded by towering, communist-era blocks on one side and a wedge-shaped park on the other.

But when Romanians gather to protest, as they have done these past weeks in record numbers, it becomes a place of pent-up frustration; against the ruling class, the direction in which the country is heading and the way many politicians continue to use the public purse as a source of cash for their personal use. This was not how it was supposed to be, ten years after the country joined the European Union.

On 31 January Romania’s new government, in power for less than a month, sneaked in a piece of emergency legislation during a late-night session to weaken the punishment for abuse of power, negligence while in office and conflict of interest. In effect, the move decriminalised some forms of corruption, if the financial damage caused amounted to less than roughly £38,000.

Many Romanians and international observers saw it as a brazen attempt to help politicians facing legal problems, prominent among them Liviu Dragnea, the leader of Romania’s largest political party, the Social Democrats, and the president of the Chamber of Deputies (Romania’s House of Commons). Dragnea is facing trial for supposedly getting colleagues added to the public payroll even though they do not work for the state. He is one of many public officials facing a day in court; in fact, he has already faced the courts, earning a 2015 conviction for electoral fraud that barred him from becoming prime minister despite his party’s strong showing in parliamentary elections last December.

The backlash against the ordinance was swift, as night after night tens of thousands, even hundreds of thousands, and, once, half a million took to the streets to protest. On 5 February, between 500,000 and 600,000 people protested across Romania, with 300,000 in the government square alone. Demonstrations have also taken place in 50 towns and cities in the country, as well as in the Romanian diaspora.

The government backed down on its immediate plans and repealed the decree, but trust was by then long gone. Protests are now in their third week and, despite snowfall, show little sign of ending.

“This government needs to go. You can’t be elected in December and have hundreds of thousands on the streets in a month,” said Dorial Ilie, a 33-year-old PR worker, one cold evening in the square.

Romanians are fed up with corruption. The country sits 57th in Transparency International’s corruption perceptions index – up from 69th place in 2014, but corruption remains endemic, and Romania is near the bottom of the list when it comes to EU countries.

Despite the efforts of the country’s much-admired National Anti-corruption Directorate (DNA), set up in 2003 and responsible for the successful prosecution of thousands of politicians, civil servants, judges and business leaders, there is a sense that the rich and powerful still operate as if they were above the law. This was certainly not helped by the attempts to change the anti-corruption legislation.

“They had been planning to do this for years,” said Dan Popescu, a 46-year-old priest protesting in the square, echoing the sentiments of many of those around him.

The demonstrations, the largest in the country since the fall of Nicolae Ceausescu in 1989, have been an impressive display of people power in a country that is increasingly using the streets as a communication platform. Large-scale protests in Romania also brought down the last elected government in November 2015, after corruption was blamed for a fire in a Bucharest nightclub that left 64 dead, and before that, mass protests during the 2014 presidential election, this time over mismanagement of diaspora voting, arguably helped tip the balance in favour of the now-incumbent, Klaus Iohannis.

Protesters are hoping for a similar impact this time around, although, having survived a no-confidence vote in parliament on 8 February, the new government shows little willingness to depart.

At the same time, most of those gathering night after night in Victory Square – as the drab square outside the government building is officially known – are still loudly demanding the resignation of the government, but would probably settle for the resignations of Dragnea and the prime minister, Sorin Grindeanu.

After so many nights standing out in the cold, protesters have become very creative. Elaborate banners filled with puns (“We don’t BeLiviu”) have appeared, as have messages written with lasers and projected on to nearby buildings. Some have shone the Batman symbol on to the roof of a nearby museum, a funny (or perhaps desperate) plea for help. The national anthem is often sung. On Sunday, a sea of protesters held up pieces of paper coloured over their phone lights to create a vast Romanian flag.

Despite these touches of humour and inventiveness, there is a steely determination evident and it has only grown since the first night or two.

On 13 February the national parliament approved a referendum related to the fight against corruption, as proposed by the protest-supporting president. But most of those on the streets these past weeks would argue that they have already given their opinion on the matter.

Many Romanians are increasingly frustrated that they have to head out to protest time and again in order to hold their elected officials to account. Few believe that the present political class can change. “They’ll try again, in another way. Maybe in parliament, where they have a majority,” said Ioana David, an administrative worker for a construction company.

Even so, she – like so many others – is likely to continue to go out into Victory Square in the days and perhaps weeks ahead, in order to make sure her voice gets heard.

This article first appeared in the 16 February 2017 issue of the New Statesman, The New Times