So much for expansionary fiscal contraction in the UK. Not that that’s a surprise.
The UK Office of National Statistics has just released preliminary estimates for real GDP growth in 2011Q4. The 0.8% contraction (q/q SAAR) was large than consensus [1], and in fact larger than the 0.6% decline forecasted by Deutsche Bank on 1/18. Figure 1 illustrates the fact that a year and a half after the election of a coalition government bent on a path of austerity, the UK economy is likely to be entering a new recession (not that growth was so great even before the dip).
Figure 1: Annualized q/q growth rate of real UK GDP (blue), preliminary figure for 2011Q4; and Deutsche Bank forecast (red). Source: UK ONS, and Deutsche Bank, Global Economic Perspectives, 18 Jan 2012.
In my view, this is pretty much the nail in the coffin that an expansionary fiscal contraction will occur, even in a relatively small, open economy with a flexible exchange rate (see JEC/Republicans for an exposition, and this post for a critique).
Simon Wren-Lewis and Mainly Macro provides additional commentary, which I think advocates of austerity in the US would do well to heed:
The first estimate of UK growth in the last quarter of 2011 was negative. As these updated NIESR charts show, no other UK recovery has stalled in this way. Of course very little is ever certain, but we can be pretty sure that growth would have been significantly better if the current government had not imposed severe additional austerity measures beginning in 2010. (This is the counterfactual that matters, and just looking at GDP components can be a misleading way at getting at this for reasons I discussed here.) Of course growth might have been better too if the Euro crisis had not happened, but this government had no control over the Euro crisis, while it does decide fiscal policy.
I do not have anything very new to say about this, in part because many people predicted growth would be harmed before the policy was introduced. (See, for example, this letter from 80 economists published during the 2010 election campaign.) What was the reason for this major macroeconomic policy error? For some I think it was a political calculation that it would be advantageous to get as much of the cuts out of the way early, well before the next general election. However I think others in the coalition were genuinely spooked by events in Greece and elsewhere. Unfortunately the key difference between economies in the Eurozone and those with their own central bank was not appreciated. Today the claim that if these additional austerity measures had not been introduced UK interest rates on debt would have suffered the same fate as many Eurozone countries looks pretty implausible. In Denmark we even have an example of a country that has recently undertaken stimulus measures, and where interest rates have continued to fall in line with other countries outside the Eurozone (see David Blanchflower here).
So I believe we must add 2010 to a list of major macroeconomic policy errors made in the UK since the war. Like the failed monetarist experiment in the early 1980s, it is the result of a government adopting a policy which relied on a mistaken macroeconomic analysis that was not supported by the majority of academic opinion. And like that earlier failure, it will leave unemployment significantly higher than it need to have been for many years.
So, time for those in the US calling for an end to the payroll tax reduction, the reduction in food stamp programs, and cessation of stimulative monetary policies, to read a macroeconomics textbook. I suggest Greg Mankiw’s.
Leave a Reply