The weak recovery the British economy is witnessing is mostly the result of increased government spending
George Osborne claims that the recovery has begun and that this was due to his austerity policy. This is factually incorrect on both counts. Britain has entered its sixth year of slump and remains more than 3% below its previous peak level. Apart from Italy, this is the worst performance in the G7.
But it is also incorrect to state that the recovery owes anything to austerity policies. The final data for the second quarter shows government consumption has been rising since the end of 2011 and largely accounts for the very modest rise in GDP over that period. Government consumption has risen by £7.7bn in real terms while GDP has increased by £11.7bn at the same time.
Government spending also led the very weak recovery, as GDP did not begin to expand until autumn 2012. Far from being a vindication of austerity, increased government spending has led the very weak recovery and statistically accounts for nearly two-thirds of it.
Separate data from the Office of National Statistics on public finances confirms this. In cash terms, not inflation-adjusted, net departmental outlays were 6.7% higher in the first half of this year compared to the same period in 2012. These exclude interest payments on government debt. But since prices rose more slowly, this represents a significant increase in real spending.
British government finances are notoriously opaque so it is very difficult to see where this money has gone. It is possible that the sharp rise in temporary, part-time and low-paid jobs has had the effect of pushing up the cost of benefits to those in work. This is in effect a subsidy to weak or extremely exploitative employers. Despite cuts to basic services there is too a vast increase in waste in the education and health budgets, arising from their creeping privatisation.
None of this is to suggest that austerity has not been implemented. On the same measure, the cash totals for departmental outlays were unchanged over the three years ending in financial year 2011-12. This was a very sharp drop in real terms. But the response was economic stagnation after a severe contraction. It is only after government consumption has risen that the economy has expanded.
This is the worst type of “plan B” that could have been implemented. The cause of the slump is an investment strike, a refusal by the private sector to invest. The contraction in investment is now very much larger than the total decline in GDP. The coalition has exacerbated this by cutting its own investment and squeezing local authorities’ budgets.
No economy can sustainably grow without increasing production and productive capacity through investment. But thanks to government policy, the British economy has entered one of its frequent bouts of consumption-led upturns, which are destined to bust. Yet now that government day-to-day spending has increased, there is no going back. Otherwise, the Tory party would be staring at electoral annihilation rather than inevitable defeat in 2015.
This has important implications for Labour policy too. It is bizarre to commit to sticking to Tory spending plans when the Tories themselves are not. The political party conference season already demonstrates that we are in a contest about who will soften the effects of falling living standards in 2015. Increased government spending has been key to producing even a weak recovery and it could be much better spent.
The investment strike remains the driving force of the slump. For a genuine recovery, government must increase its investment where the private sector refuses to. This includes transport, infrastructure, housing and energy production.
In response to an exceptionally modest plan to temporarily cap prices, the energy companies threaten an all-out investment strike in their sector. The billions in dividends paid to shareholders are a structural obstacle to capping prices and simultaneously investing in decarbonisation. In order to do both, the failed experiment of privatisation should be reversed so that government can direct investment.
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