Sunday, July 17, 2016

Austerity is the giant 'natural experiment' that cost a British treasurer his job

What if the prime minister sacked the treasurer and promised to govern for everyone, not just those near the top?

"That means fighting against the burning injustice that if you're born poor you will die on average nine years earlier than others; if you're black, you're treated more harshly by the criminal justice system than if you're white; if you're a white working-class boy, you're less likely than anybody else to go to university; if you're at a state school, you're less likely to reach the top professions than if you're educated privately; if you're a woman, you will earn less than a man; if you suffer from mental health problems, there's not enough help to hand; if you're young, you'll find it harder than ever before to own your own home."

The prime minister is Britain's Theresa May, outlining a new set of priorities. And yes, she did sack the treasurer as soon as the Queen commissioned her on Wednesday.

George Osborne had been Chancellor of the Exchequer (Britain's treasurer) since the Conservatives won office in 2010. Inheriting an economy only just emerging from the global financial crisis he blamed Labour for the resulting debt and introduced a £40 billion ($70 billion) austerity budget that hiked the goods and services tax and slashed welfare and infrastructure spending in order to quickly restore the budget back to surplus.

I should point out that there's no real parallel in Australia. Despite all their talk about quickly restoring the budget to surplus, Tony Abbott and his treasurer Joe Hockey were far too clever to attempt to do it here, as are Malcolm Turnbull and Scott Morrison.

The ratings agencies applauded, and Britain's economic recovery collapsed. The Nobel Prize-winning economist Paul Krugman says the UK was almost unique in having "gratuitously chosen to pursue austerity".

Six years of depressed economic growth later the ratings agencies took away its AAA credit rating anyway in the wake of Brexit vote. The vote was in part a reaction to what British citizens had had to endure.

Now a new study, by Larry Summers and Antonio Fatas of the US National Bureau of Economic Research, finds that rather than boosting confidence and economic growth as the British treasury had expected, or at least damaging it for only a short time, the austerity budgets in Britain and its neighbours appear to have left "permanent scars", lowering economic growth for good though a process known as hysteresis.

Hysteresis is a scientific word referring to the phenomenon by which when some materials are heated or given an electric charge they change permanently, not reverting to their former state when the heat or charge is removed

While they don't put numbers on the lower economic growth they think Britain will have to permanently endure as a result of the austerity budgets, other estimates suggest the UK economy is 4.5 per cent smaller than it would have been had the budgets not depressed an already weak economy. And to little effect. The wonder of mathematics means that winding back GDP growth in order to cut the debt-to-GDP-ratio itself pushes the ratio up.

Krugman says Britain has just conducted what amounts to a giant natural experiment. We'd be wise to note its results. Theresa May already has.

In The Age and Sydney Morning Herald