UK austerity and the UK economic miracle – some surprising data

The official data produced by the independent UK Office for Budget Responsibility supporting the recent Budget, showed up a surprising fact about UK government spending. The major focus of the Coalition Government since it came to power in 2010 has been the control of government spending and consequent reduction in the budget deficit from the £170bn (and 11% of GDP) it inherited from the previous government. Yet the official data show that in each of the two fiscal years that this government has been in office, current government spending has risen in real terms, that is to say after inflation has been accounted for, and that in a two year period when inflation has been permanently above the Bank of England’s 2% target due mainly to the increases in VAT, which are part of the deficit reduction strategy.

It could thus be argued that in the UK, austerity has not yet even begun. That would not be entirely fair, since the measure of current government expenditure excludes capital or investment spending by government. Investment projects are possibly the easier areas of government spending to cut quickly, and there have been large real reductions in non-current government spending. Further, some parts of current spending were permitted to grow in real terms – these were health spending and overseas aid. In addition the automatic economic stabilisers of rising welfare entitlements and rising interest costs on the national debt, have meant that economic weakness tends to boost current government expenditure. Most areas of government spending have seen austerity cuts (with many more to come over the next few years), but for real government spending as a whole, there has been no reduction.

In fact history suggests that such a goal is very difficult to achieve. Mrs Thatcher’s government from 1979 to 1990 did not manage to reduce real government spending, and since then it has risen every year. In nominal (actual cash) terms UK government spending has never fallen year-on-year since 1945..

For the government, the plans for current spending reductions in the next few years imply that the really hard (and unpopular) work only starts now. This may well affect their poll ratings significantly for the next year or two without a clear improvement in economic growth. For the Opposition Labour Party, their claim that the government has been cutting too far and too fast, and that a slower pace of cuts would be more effective do not stand up to any scrutiny as real government spending has not yet even started to fall.

 

 

HSBC compiled some fascinating data for economic growth amongst the major Western economies for the first decade of this century.

2001-2010 average annual % growth rate               Overall                              Per Capita

Japan                                                                                                0.8                                       1.6

UK                                                                                                      1.5                                         1.2

Germany                                                                                           0.8                                        0.8

US                                                                                                       1.6                                         0.7

France                                                                                                1.2                                         0.6

 

There are several surprises here, first Japan’s “lost” decade, the subject of many lectures from Americans and Europeans, is actually a demographic issue. Per capita growth in Japan was double that of the US and Germany and France – Japan has for some time been very aware of its ageing issues and has invested heavily in automation and robotics in order to boost its productivity. Secondly the strength of the US economy is also mostly about demographics – in this case both a younger population than the other countries, arguably reflecting a greater openness to immigration.  Finally the strong performance in both columns of the UK economy – a recent paper from Corry, Valero and Van Reenen confirms this strong  performance and attributes it to service sector productivity factors such as technology and regulation (though NOT banking regulation!). Perhaps history will judge Gordon Brown’s stewardship of the UK economy in this decade more favourably than current commentators.

 

 

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