Sounds about right

The Office for Budget Responsibility, in its major review in this area, found: “Looking back at the pre-crisis era, it is hard to argue that the tax and spending policies implemented in the early and mid-2000s are in themselves an important cause of the crisis and recession. But there was undoubtedly weaknesses in fiscal management during that period, some apparent at the time and some more with the benefit of hindsight.

“The Labour government increased public spending significantly as a share of GDP in the mid-2000s, arguing this would be paid for by an increase in tax receipts that then did not fully materialise.”

It added that the OECD warned at the time that the UK had entered the crisis with one of the largest structural deficits in the industrial world and this limited subsequent room for manoeuvre.

Towards the end of the longest modern times economic boom even the most naive Keynesianism suggests that you should be running budget surpluses. No, not to pay down the national debt particularly, not even to create more room for orrowing whenever the bust does come. But simply to be cooling the economy itself. For even that naive Keynesianism does come with the idea that while stimulatory fiscal policy is sometimes a good idea, so also is sometimes austere fiscal policy (err, in the boom, not the bust).

And no, saying that you’re talking about the “current” deficit, ignoring what is being done to “invest” doesn’t cut it. They’re both stimulatory which is probably what you shouldn’t be doing at the peak of a boom.

Do note that this doesn’t rely on any neoliberalism, Austrian theory or anything else. This is plain, simply, vanilla, Keynesianism. And they didn’t even get that right.

9 comments on “Sounds about right

  1. I have two further points .It is not just the spending but the
    trajectory -the future spend embedded into future costs not present in the current.Here I am thinking of PFI pension costs for the additional public sector workrs being employed future interest costs etc.The second is Brown’s tax projections relied heavily on the continuation of income from the causes of the crisis a credit bubble feeding certain asset classes hence he was expecting stamp duty capital gains taxes inheritance taxes etc to continue to grow as a share.

  2. Where are we at the moment then? Inflation is low (chiefly thanks to the drop in oil prices) but unemployment is rock bottom too. It looks like there’s very little spare capacity in the economy; wage inflation is the only dog that didn’t bark, but it is tempered by continuing immigration from Eastern Europe.

    Or just use house prices to measure the heat in the economy. This tells us that fiscal & monetary policy was too expansionary during the Blair years, too tight under Brown and early Osborne, and now too loose again.

  3. “Inflation wasnt excessive.”

    Wasn’t it? Depends how you measure it of course. The price of cheap sh*t from China wasn’t rising to be sure. But the price of the houses everyone has to live in certainly was. Just because the State has fixed its inflation figures to not include the price of the most major purchase any individual or family will face doesn’t mean there wasn’t inflation.

  4. “This is plain, simply, vanilla, Keynesianism”: rubbish. You are confusing Keynesianism with the Economics of Keynes.

    It’s as silly as confusing Christianity with the Teachings of Christ.

  5. You guys understand all this far better than I do, but wasn’t GDP growth itself through the 2000’s “exaggerated” – in that it was influenced (increased) by borrowing (eg equity release from rising house prices).

    Hence, not just inflation (unrecorded due to house prices), but not even the increases in productivity that one might have presumed from the GDP numbers?

  6. @ PF
    Not only was it artificially boosted by consumer spending financed by “mortgage equity withdrawal” of around a *trillion* pounds but it was also overstated for two reasons – (i) an error was inmtroduced into the RPI calculation in late 1997 and not corrected until late 2010 that caused RPI inflation to be understated by around 1% pa so “real” GDPRPI inflation

  7. @ PF
    Not only was it artificially boosted by consumer spending financed by “mortgage equity withdrawal” of around a *trillion* pounds but it was also overstated for two reasons – (i) an error was inmtroduced into the RPI calculation in late 1997 and not corrected until late 2010 that caused RPI inflation to be understated by around 1% pa so “real” GDP was overstated because the “GDP deflator” that converted the rise in nominal GDP to “real GDP” was understated, and (ii) Brown tried to hide the extent of his overspending by various tricks to bring forward tax payments, one of which was to say that banks could not claim tax relief for loan losses that would not crystallise within 12 months so bank profits were overstated by tens of £billions and consequently so was GDP.
    In case any of you did not notice, Brown helped to create the banking crisis. It wasn’t just that he was asleep on watch.

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