UK News

Insights from the UK and beyond

from Anatole Kaletsky:

Even Britain has now abandoned austerity

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.

Spend and spend some more?

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Recent headlines alarmed us with news of the country’s budget deficit having risen to its largest in six decades, while top economists ominously declared that we’ve moved beyond merely tipping into a recession, to hurtling towards one.

Pennies
More crucially, both Chancellor Alistair Darling and Prime Minister Gordon Brown have sought inspiration from revered economist Maynard Keynes’ oft-cited advice – spend and spend some more to fight off the ill effects of an economic slump. Keynesian theory’s greatest principle is the fundamental concept of the circular flow of money. He opined that when individuals rein in money outflow, the government needs to be “priming the pump”.

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