nef (the new economics foundation)

“Austerity is the best way to reduce the deficit and get the

economy back on track”Owen Jones, The Independent

James Meadway, nef

nef (the new economics foundation)

The myth

“Like a family who has overspent, we need to reign in our spending to get our finances in order and impress the financial markets.”

nef (the new economics foundation)

In the wild

“Labour maxed out the nation's credit card, and they still want to carry on spending. Ed Miliband and Ed Balls fail to realise that when you're up to your neck in debt, it's time to pay it off”

– Eric Pickles, March 2011

nef (the new economics foundation)

In the wild

“We are asking the British people to reduce the record budget deficit and pay off the national credit card.”

– George Osborne, April 2011

nef (the new economics foundation)

In the wild

“If you have maxed out your credit card, if you put off dealing with the problem, the problem gets worse.”

– David Cameron, June 2011

nef (the new economics foundation)

In summary

• The economy is not like a household. By perpetuating recession, austerity fails to reduce debt as a share of GDP

• Arguments in favour of austerity are flawed• The evidence shows that austerity has failed

nef (the new economics foundation)

The reality: the economy is not like a household

• Every £1 spent is also £1 earned – by someone else. So if someone spends less, someone else must earn less (the “multiplier effect”)

• The main driver of this recession is a fall in spending by businesses and households

• By also choosing to spend less, the government worsens the recession

nef (the new economics foundation)

Cuts in government spending

Continued recession

Rising deficit (falling tax receipts, rising social security payments),

slower growth

Debt rises as a share of GDP

The reality: the economy is not like a household

nef (the new economics foundation)

“Austerity doesn't work. In conditions of inadequate demand, budget cuts cause a more than proportionate reduction in GDP – in technical terms the so-called fiscal multiplier is greater than one. This means that for every million pound reduction in the budget deficit, the country's GDP falls by more than a million pounds, leading to a rise in the ratio of debt to GDP.”

– George Soros, April 2013

The reality: the economy is not like a household

nef (the new economics foundation)

In reality: the arguments for austerity are flawed

• The austerity argument relied heavily on two academic papers– Alesina and Ardagna’s argued spending cuts can produce

growth…– …but they didn’t count periods of austerity properly– Reinhart and Rogoff said high debt cuts growth…– …but they messed up their spreadsheet calculations (amongst

other things!)• Meanwhile, the IMF has dramatically changed its views

on the fiscal multiplier: “Our results indicate that multipliers have actually been in the 0.9 to 1.7 range”

nef (the new economics foundation)

In reality: the evidence shows austerity has failed

nef (the new economics foundation)

In reality: the evidence shows austerity has failed

nef (the new economics foundation)

So why are they still doing it?

1. Ideology2. The ‘global race’3. Preparation for the next financial crisis

nef (the new economics foundation)

The alternatives

• Don’t cut! Spending cuts hurt people and have no economic justification

• Invest and use industrial strategy to create decent, sustainable jobs

• How do we afford it?– Tax the super-rich– Stop tax dodging by corporations and rich individuals– Green QE– Take advantage of record low borrowing costs