The Age of Austerity is over. This is not a prediction, but a simple statement of fact. No serious policymaker anywhere in the world is trying to reduce deficits or debt any longer, and all major central banks are happy to finance more government borrowing with printed money. After Japan’s election of Prime Minister Shinzo Abe and the undeclared budgetary ceasefire in Washington that followed President Obama’s victory last year, there were just two significant hold-outs against this trend: Britain and the euro-zone. Now, the fiscal “Austerians” and “sado-monetarists” in both these economies have surrendered, albeit for very different reasons.
Much attention has been focused this week on the chaos in Cyprus. Coming after the Italian election and subsequent easing of Italy’s fiscal conditions, the overriding necessity to keep Cyprus within the euro — and its military bases and gas supplies outside Russian control — will almost surely mean another retreat by Germany and the European Central Bank from their excessive austerity demands. But an even more remarkable shift has occurred in Britain. The Cameron government, which embraced fiscal austerity as its main raison d’etre, was suddenly converted to the joys of debt and borrowing in this week’s budget.
Of course, the rhetoric of British Chancellor George Osborne’s budget speech gave no hint of his Damascene conversion. On the contrary, it ridiculed “people who seem to think that the way to borrow less is to borrow more.” But Osborne’s trademark sneers could not disguise the meaning of the policies and numbers he presented.
Long after the U.S., Japanese, Chinese, Canadian, Australian and most European governments, Britain has finally been forced to accept Keynes’s “paradox of thrift”: A government that tries to reduce its borrowing during a recession generally weakens the economy so much that it ends up increasing its total debt. Conversely, a government that expands deficits during periods of weak economic activity, or finds ways to encourage private borrowing and discourage private saving, usually ends up lightening the national debt burden.
Osborne’s budget numbers presented a textbook example of Keynes’s paradox. In last year’s budget, Osborne predicted that government debt would peak at 76% of GDP in fiscal year 2014/15; but this week, despite (or because of) another year of Draconian tax increases and spending cuts, he has projected the government’s debt burden to keep rising for a further two years, to 86% in 2016/17. Contrast this with the U.S. budgetary experience, where the debt ratio has already stabilized near Osborne’s original 76% target, despite (or because of) the Republicans’ refusal to raise taxes and the Democrats’ refusal to cut spending on anything like the British scale.