I have been reading an interesting book by William Keegan, the senior economic commentator for the Observer newspaper, entitled “Mr Osborne’s Economic Experiment, Austerity 1945-51 and 2010”.
It argues that there have been two “cataclysms” to hit the British economy in 70 years, the first after the war and the second since 2010, and compares how they were dealt with.
The first was after the Second World War. The economy was exhausted, and income for overseas investments had been greatly reduced. Because of this, the country found it difficult to pay for necessary imports without squeezing demand at home. Austerity was inevitable, but Keegan points out that it was equitably shared. The basic rate of income tax was 45p and there was rationing. But at the same time, the government embarked on an ambitious house-building programme and, as everyone knows, set up the NHS.
Compare this to 2010. There had been the famous collapse of the banks in 2008, basically because they lent too much and took too many risks. The head of RBS is said to have telephoned the then Chancellor, Alistair Darling, and said the bank could collapse “within hours”. This could have led to financial panic.
Government spending as a percentage of gross domestic product (GDP) before the crash had been almost 40%. This was roughly the same as when Kenneth Clarke had been Chancellor under the previous Conservative government. As many of you remember, the Government had to bail out the banks, and this pushed public spending as a percentage of GDP up to almost 50%. One, RBS, is still owned by the taxpayer and is struggling to become profitable. The result was a slump in the economy, and economic growth stalled.
Now, as everyone knows, the extra money which was borrowed had to be paid off. But as Keegan points out, it is easier to do this if the economy is growing. It had begun to do this again by the end of the Labour Government in 2010.
The main argument of his book is that the austerity squeeze imposed by the current government was a deliberate political decision, and was mostly felt by the less well-off, while taxes on the better off were reduced.
The reason for the crash and the need to borrow extra money was not excessive spending by the Labour government. If the public spending had been reduced less quickly, and in a more equitable manner, the economy would have continued to grow and there would have been more money to pay off debts.
Economics is basically about how people behave. As Keegan points out, if an economy is squeezed, people are careful about spending money, and businesses reluctant to invest. Keegan is a classic Keynesian, and states the basic premise of that famous economist: “When the private sector loses confidence and cuts back its spending, then it is the duty of the public sector to fill the gap, not aggravate the crisis by cutting, or restricting, its own spending.”
The Government’s approach was not only unsuccessful (we are actually borrowing more now than in 2010) but socially unjust.
Books like this help counter the message being put out by the Conservatives that austerity was necessary and all the previous government’s fault. But there is a bit more to the recovery than simply more public spending. How it is spent is important.
I was lucky enough to hear Alistair Darling speak at the Sage last week. He argued strongly that a proper recovery must be spread across the country. Simply allowing London to expand is not only bad for everywhere else, but bad for London too.
The regions have to be able to build up their infrastructure and train their workforces in order to encourage economies to grow away from London. “Unlocking their potential” is a hackneyed phrase, but it is true.