Fact Check: has austerity held back economic growth?

Too much of a squeeze? keenteegardin/flickr, CC BY-SA

In the last five years, austerity has undermined our public services, lowered the living standards of working people, pushed more children into poverty and held back economic growth.

Nicola Sturgeon, Scottish first minister and Scottish National Party leader at the party’s manifesto launch.

It is easiest to start at the end. Conventional macroeconomics would agree that fiscal austerity and cuts to government spending did hold back growth. The Office for Budget Responsibility estimate that austerity reduced growth by 1% in each of the financial years 2010-11 and 2011-12. In the graph below, the orange bars show the impacts on growth of austerity expected in 2010 and the blue bar how they have changed. Others have higher estimates.

Implied impacts of discretionary fiscal policy on GDP growth. OBR

The key point here is that because short-term interest rates had fallen as far as the Monetary Policy Committee of the Bank of England thought they could go (0.5%), monetary policy was not able to offset the impact of fiscal contraction – cuts to government spending, or austerity. Instead, monetary policy had to resort to Quantitative Easing: creating money to buy long term assets in order to put downward pressure on long term interest rates. Quantitative Easing probably had some effect on the growth rate, but almost certainly not enough to counter the impact of fiscal austerity.

Lower growth caused by fiscal austerity would normally mean one of two things: higher unemployment or lower living standards. An unusual feature of the past five years is how quickly unemployment has fallen, even though GDP growth has not been strong. As a result, the main impact of lower growth – including that caused by fiscal austerity – has been on living standards.

Standing tall against austerity. Danny Lawson/PA Wire

Fiscal austerity has involved reduced public spending in many areas, including welfare payments. The general consensus among economists such as those at the Institute for Fiscal Studies is that fiscal consolidation has hit two groups more than most: the rich and the poor. It is therefore reasonable to say austerity in itself has increased child poverty. As living standards have fallen generally, then relative levels of poverty in general – which measure the poverty gap – have not increased over the last few years, although absolute levels of poverty have. However, Sturgeon is careful in her statement to talk about the impact of fiscal austerity.

The assertion that fiscal austerity has “undermined our public services” comes close to being a tautology. To suggest otherwise you would have to argue that spending less on public services has only increased the efficiency with which they were delivered.

Verdict

Nicola Sturgeon’s statement on the economic impact of austerity on the UK is correct, with no qualifications.

Review

I don’t have any major disagreements with the author’s analysis. There are two particular provisos that may be worth raising. The first is that the stagnation in standards of living under the coalition period (and from before that) partly reflects the UK’s very poor productivity performance at this time. It could be argued that this largely reflects austerity: had demand been higher, companies would have been able to sell more which would probably have resulted in higher productivity. For example, if a factory is idle, workers are under-employed or not able to get jobs in relatively high productivity sectors because of lack of demand. Alternatively the author may simply be arguing the austerity isn’t the only problem here, but it is one problem and so Sturgeon is correct.

Second, Sturgeon’s comment about child poverty might be worthy of some specific reference to what has happened to it. It is not my particular area of expertise, but the previous decline in child poverty appears to have been reversed around 2011, although has remained flat since, and this may be worth noting.

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