Austerity economics, Brexit and the Government’s deficit from a Keynesian perspective. What are the choices?


Brexit or no Brexit, we have to improve and stimulate our flagging economy. We cannot blame Brexit for everything. We haven’t even started to leave the EU yet. Nothing has really changed. If there are problems we need to look at the effects of past years of austerity economics first.

The usual charge made against those of us who are of a more Keynesian inclination and who argue against austerity economics is that we are far too ready to let the Government’s deficit increase. In other words, that our policies will involve too much public borrowing, which will only add to high levels of public debt.

This is not necessarily true. But, we do need to understand what the government’s deficit is, how it originates, and why it was so difficult for George Osborne to make good his election pledges of reducing it, let alone turning it into a surplus. We can perhaps expect Philip Hammond to have the same problem. Tories seem very slow learners at times.

It must be obvious to everyone by now that reducing Government spending, or trying to reduce it, and increasing rates of general taxation, like VAT, has had a deflating effect on the economy which has in turn led to reduced taxation revenues. So the reduction in the deficit has not at all been what it might have been calculated to be in advance. The national macro-economy is quite unlike a household micro-economy in which income and expenditure can be regarded as being largely independent of each other.  As the economy has slowed, interest rates have been reduced to absurdly low levels in a attempt to increase the levels of private debt in an already unstable economy which has far too much reliance on personal credit to generate sufficient spending by a reluctant private sector.

If we look at the problem from a different angle, we can see money flowing into the economy from Government spending and a lesser amount returning to the Government in the form of taxation revenue. The difference is simply what everyone else but Government saves. That ‘everyone else’ includes our overseas trading partners who like, on average, to sell us more goods and services than they buy. They are the big savers and the trade deficit that inevitably results has recently been almost entirely responsible for the Government’s own deficit.

Many of us, for example Prof Steve Keen at Kingston University in London, who have perhaps a less laissez-faire attitude to the economy than might be typical in Tory circles, argue that the trade deficit needs to be actively reduced. Reduce that and the Government’s deficit will reduce too. Others say we should not interfere with the UK’s trade, or the exchange rate, but neither let’s not worry so much about any deficits that result providing that inflation is kept well under control.

These are the two sensible choices for any British government to make. Either way we will be able to harness more of the available resources in the country which are needed to run our health and education programs.

The austerity choice is one that makes no sense at all. It should not be considered to be a left/right issue and so anti-austerity economic policies should fit in neatly with Liberal Democratic philosophy.

The anti austerity argument holds true both for businesses which have their profitability squeezed, their viability threatened as a result of deflation and low demand for their products, and also their workers who will potentially lose their jobs when there is insufficient demand for their labour.

* Peter Martin is not a LibDem party member but has voted LibDem in previous elections.

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  • The deficit arises simply by spending more than we earn. So cutting costs or encouraging growth are the solutions. The trouble is that the Blair boom was a mirage based on debt – which the economists said didn’t matter. After the crash it was clear that debt did matter and that all it did was mask the industrial decline. For real growth this time we need industrial growth. To just spend more money is no solution by itself. It would need to be spent on pursuing industrial growth and not just frittered away. It is our children who will have to pick up the bill.

  • Jenny Barnes 14th Aug '16 - 8:57am

    The multiplier effect of additional money in the economy is mirrored by what happens when you take money out of the economy. Add £1 to the economy, it gets spent, and you actually get more than £1 worth of stimulus. Take £1 out and you lose more than £1 of activity. If your economy is running under trend growth, you want stimulus, not deficit economics. Osborne has always been staggeringly ignorant of economics. Once you have near zero interest rates, the only way to get the economy growing is either to cut taxes or increase government investment or social security payments. A small citizens wage would be good, for example, so would a large public sector housing programme.

  • Petermartin2001: Any debt which was repaid presumably had to be paid for from taxation. Unpaid debt would have incurred interest. It all depends who paid the taxes as to whether it seriously affected people’s living standards but many ordinary people paid 33% of their taxable income in tax although the rich probably did not pay so much if they could avoid it.

  • Matthew Huntbach 17th Aug '16 - 12:11am

    Why do we call it “austerity” when we live in a society where stupendous frivolous luxury is becoming a more and more prominent feature due to those at the top of it having their income, in terms of the number of times it is a multiple of the average income, increasing hugely?

    Surely a society that was really about “austerity” would be one that eschewed luxury and therefore made a particular point of taking money away from the super-rich in order to stop that sort of luxurious living and encourage a society led by people who lead a simple life.

  • Lorenzo Cherin 17th Aug '16 - 12:59am

    Matthew Huntbach

    I like what you said on austerity more than most of what you have written , when I agree with you or disagree with you it is strongly , but I respect your values even when your manner is not my cup of tea ! On this thread comment it is high tea indeed !

    It is an obscene waste of human potential that the economy and society is skewed in the direction it is .I have come to expect the inequality even as I crave action.

    The very thing that drives me potty , as a moderate on many things yet a radical on some , is that there is not only so much money at the top , squandered by individuals with more than they have a clue what to do with , but is wasted by governments even now , local or national who always seem able to get their hands on money for the very things not worth paying for !

    My local council spent a million pounds two or three years ago , money sourced from goodness knows where , to flatten the pavements , to create the supposed environment of a cafe society , for local bars to have more seats outside . It did not dawn on them to pedestrianise the streets however and now they have had to put in bollards as cars are nearly coming onto the pavements and even so the bollards get dented !

    Spending of money too often seems demented !

  • nvelope2003 20th Aug '16 - 9:00am

    What about the crazy road schemes which make things worse rather than better and the creation of unnecessary roundabouts, not to mention subsidising bus services which carry almost no passengers because of pressure from some councillor anxious to make themselves popular with certain interests. I could go on but it is too depressing.

    Why should we have to pay for such nonsense when there are real needs which are not met ?

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