26th April 2013
The economy may well have grown at 0.3 per cent in the last quarter bringing some respite to the Chancellor George Osborne. But the ranks of the sceptics who want a change of tack or at least a change of pace are growing writes Philip Scott. Some have always been critical of front-loaded cuts, others are more recent converts.
The debate has been significantly spiced up by the fact that two hugely influential Harvard economists Ken Rogoff and Carmen Reinhart have found themselves in the line of critical fire after a student spotted a not insignificant mistake in an academic paper of theirs which is often cited to make the case for austerity cuts including George Osborne.
Pimco’s Bill Gross
World renowned investor and co-founder of PIMCO, Bill Gross has launched a scathing attack on the UK and Eurozone’s attempts to quickly slash debt with a series of austerity measures. Gross, one of the biggest figures in the fixed income market, given he runsthe world’s biggest bond fund; PIMCO’s $289bn Total Return Fund, warned that he felt the measures aimed at eradicating the albeit crippling debt, risk drowning any recovery. He told the FT: “The UK and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth. It is not. You’ve got to spend money.” He added: “In the long term it is important to be fiscal and austere. It is important to have a relatively average or low rate of debt to GDP…the question in terms of the long term and the short term is how quickly to do it.” This is from the man who in 2010 said that UK gilts were sitting on a bed of nitro-glycerin as Business Insider reported at the time.
The International Monetary Fund’s Christine Lagarde
The IMF has also stepped up to criticise developed world governments, who are failing to kick-start economic growth. It has argued widely that the likes of the UK, the US and Germany are all being too quick to tighten spending. The Washington based body has already cut its forecast for UK growth for both this year and next by of 0.3 points from its last set of predictions in January, and its publication, the World Economic Outlook, suggested the Treasury should look to more flexible measures in regards to its austerity measures. Following its re-assessment of the UK’s economic growth, the institution now anticipates an uptick 0.7% this year and 1.5% in 2014.The BBC has a key quote here. We clearly support the [austerity] policy. We’ve also said that, should growth be particularly low, then there should be consideration to adjusting by way of slowing the pace. Looking at numbers… the growth numbers are certainly not particularly good.
US Treasury Secretary Jacob Lew
Despite the IMF pointing its finger at America, US Treasury Secretary Jacob Lew has waded into the argument against austerity, calling on European leaders to ease-off on the frugality and adopt more growth-friendly policies, in the short term rather than cut their budget deficits, citing that the U.S. economy is “inextricably tied” to the health of its global partners. Quoted in the Denver Post, Lew said European leaders need to emphasise growth over austerity at a time when unemployment is approaching record highs in several countries. He also said that the Obama administration would keep working to persuade Congress to mitigate the adverse effects of the $85bn in federal spending cuts that began on 1 March.
Economist Paul Krugman
Even the most casual reader of the US economist’s New York Times blog could not fail to notice the Princeton Professor and Nobel Prize winner has not been backward about coming forward in his criticism of the austerity measures being executed by developed world policy makers. This may not be surprising for a Keynesian. Recent comments included, “When it comes to inflicting pain on the citizens of debtor nations, austerians are all steely determination – hey, it’s a tough world, and hard choices have to be made. But when they or their friends come under criticism, suddenly it’s all empathy and hurt feelings.” Another comment, stated: “We had Alesina/Ardagna saying that austerity is actually expansionary thanks to confidence effects; Reinhart/Rogoff saying that debt has terrible effects on growth via unexplained channels. This stuff was creative, different, deeply appealing to powerful people — and dead wrong.”
European Commission Vice President Olly Rehn
A recent article in the Financial Times highlights the fact that Europe’s top economic commissioner may not be so much of a hawk as many think. He did quote the Reinhart/Rogoff research but has recently pointed out it is just one piece of research and that it is reform rather than stubbornly sticking to deficit reduction targets that is important. He may not be in the anti-austerity camp, but his position is starting to sound a little more middle of the road. His latest speech this week indicates that the EU can slow down on fiscal rigour.
Shadow Chancellor Ed Balls
This is one of the more intriguing political issues. In all his statements, the Shadow Chancellor has opposed many aspects of Government policies on cuts. However the Tory press in particular have tried to put the Chancellor on the back foot with previous statements over whether Labour allowed a structural deficit to develop in 2007. Of more interest is whether Labour accepts Coalition cuts before the next election. The Guardian says the decision may be put off until much nearer the next election to deny the opposition something to shoot at.
For now though, it’s the Chancellor under fire. Crucially there has not been any flak from his own party nor – to any significant extent – the Lib Dems. Buual st opposition is growing and not just from the usual suspects.