This post originally appeared in Socialist Economic Bulletin on the 19th of November.
As the British economic crisis becomes more prolonged the outbreak of stupidity that greets every new piece of important economic data becomes more generalised. Previously there has been a campaign to suggest that austerity has led to recovery when the opposite is the case. The recovery is based unsustainably on rising consumption, led by government consumption. The publication of the latest GDP data for most major economies has now led to wild suggestions that Britain is booming and is the strongest major economy in the world.
The level of real GDP in Britain since the recession began at the beginning of 2008 is shown in the chart below. It is compared to the US and the Euro Area. British growth has been almost exactly the same as that of the Euro Area as a whole and significantly worse than US GDP growth.
Read Post →
The level of public investment is falling in most of the advanced industrialised economies including Britain. The chart below appeared in the Financial Times and has attracted some publicity because it shows this decline in the US in stark terms.
The difference between gross government investment and net government investment is accounted for by depreciation. All investment is subject to depreciation over time. This deducts from the level of gross investment. In the US net government investment (after depreciation) has fallen from 4% of GDP close to 1% of GDP.
It is set to fall further. The chart below also appeared in the FT piece but was less remarked. It shows the various Budget proposals from the Republican and Democrat parties in Congress as well as the Obama proposals. In all cases the Budget plans are to maintain a trend decline in public investment (excluding defence spending) with just one minority proposal for a temporary increase in investment.
Both the British government and the US government have talked a great deal about the need for greater investment in infrastructure and greater public investment.
Read Post →
This post was originally published on Socialist Economic Bulletin on Monday the 21st of October.
Supporters of ‘austerity’ would have a very strong argument if there really were no money left. In that case, opponents of current policy would be left arguing only for a fairer implementation of those policies, or that perhaps they could be implemented more slowly.
This is not the case. Firms in the leading capitalist economies have been investing a declining proportion of their profits. This is the cause of the prolonged period of slow growth prior to the crisis and a number of its features such as stagnant real wages, so-called ‘financialisation’ and the growth in household debt.
This negative trend of declining proportion of profits directed towards investment reached crisis proportions in 2008 and is the cause of the slump. As a consequence of the sharp fall in this investment ratio there has been a sharp rise in the both the capital distributed to shareholders and in the growth of a cash hoard held by Non-Financial Corporations (NFCs). This cash hoard is a barrier to recovery, releasing it could be the mechanism for resolving the crisis.
The chart below shows the level of surplus generated by US firms (Gross Operating Surplus) and the level of investment (Gross Fixed Capital Formation) for the whole economy. Since the former are only presented in nominal terms, both variables are presented here in the comparable way.
The nominal increase in profits has not been matched by an increase in nominal investment. In 1971 the investment ratio (GFCF/GoS) was 62%. It peaked in 1979 at 69% but even by 2000 it was still over 61%.
It declined steadily to 56% in 2008. But in 2012 it had declined to just 46%.
In a truly dynamic market economy there is nothing to prevent the investment ratio from exceeding 100% as firms utilise resources greater than their own (borrowing) in order to invest and achieve greater returns.
Read Post →
The latest GDP data were a disappointment. The world economy recovered a little around the middle months of this year. And some surveys suggested that, despite austerity, this meant Irish GDP growth recorded in the second quarter would be a bit stronger than the outturn of +0.4%. Worse, as Michael Taft points out, GNP actually contracted by the same amount in Q2.
The economy is still 9.5% below its previous peak at the end of 2007. Any talk of recovery is therefore entirely misplaced.
But it is strange that while we are halfway through the sixth year of the Irish Depression there remain a number of myths regarding the causes of the slump. One of the most prevalent of these is that the entire preceding boom was driven by solely by a housing bubble and that its bursting is unavoidably the main factor in the subsequent crash.
The chart below shows the real output of the different sectors of the economy since the beginning of the Depression. Building and construction is shown in yellow. Clearly it has contracted sharply, almost to nothing. But is also clearly not responsible for the entirety of the slump.
In fact this real measure of changes in output shows that building and construction has not even registered the largest decline in output. The table below shows the change in output of the different sectors of the economy.
Change in Real Output from Q4 2007 to Q2 2013, €bn
Industry has clearly contracted more in terms of real output than any other category and is nearly responsible for half of the total fall in output. The total for the services category is somewhat misleading as this includes rent, which has continued to rise throughout the slump.
Read Post →
This post was originally published on Socialist Economic Bulletin on the 9th of September.
The government and its supporters have been quick to claim that the most recent GDP data have vindicated its austerity policy. George Osborne says the argument in favour of austerity has been won some more excitable commentators have even talked of a boom.
Usually, SEB would provide analysis of the GDP data after the publication of the national accounts, the third release in the cycle from the Office of National Statistics, which provides a detailed breakdown of the components on economic activity and the final revision to the data.
But the claims made for the British economy following the most recent GDP release (and some subsequent surveys) are so outlandish, and so at odds with the facts, that is worth providing a short analysis now.
The data is still partial and subject to revision. But there is enough evidence to demonstrate factually that the weak recovery is not a reward for austerity, but is in fact entirely a function of increased government spending.
The economy has expanded by just 1.8% in 3 years of austerity, an annual rate of 0.6% which is less than one-quarter of previous trend growth. The gap between the current level of GDP and trend growth for the British economy is widening. In addition, the growth to date is entirely a function of increased government spending.
Read Post →
A crisis is an objective fact to which there can essentially be only two responses. The cause can be identified and addressed, or some other explanation can be advanced which effectively shifts the blame for the crisis elsewhere. The government and the supporters of austerity are increasingly bent on the second course.
A succession of scapegoats have been offered for the crisis, including perniciously both immigrants and ‘scroungers’, and now unions. However, as these cannot begin to provide an economic explanation for the crisis, the supporters of austerity also persistently claim that the cause of the current crisis is weak exports, effectively blaming foreigners for the British crisis.
The reality is very different. The chart below shows the trend of total domestic expenditure in the course of the present slump. This is the same as GDP minus the changes in both imports and exports. In 2008 and 2009 activity fell sharply and was followed by a mild recovery. But since the Tories began to implement austerity the domestic economy has stagnated.
Read Post →
The national launch of the People’s Assembly Against Austerity is a very welcome development. It brings together a number of the largest unions, anti-cuts group and political forces both inside and outside the Labour Party in opposition to austerity policies.
Many will have been drawn into active opposition to government policies because a single aspect of them, perhaps the cuts in public sector pay and pensions, or social protection for people with disabilities, or the imposition of the bedroom tax or the very high level of unemployment among young black people, or the string of cuts which have driven women out of public sector jobs, facing reduced childcare provision and increasingly bearing the burden of reduced social care.
All of these policies are linked and generally go under the title of ‘austerity’. The term is a little misleading, as it implies that conditions have generally become worse for all. But that is not the case.
Transfer of incomes
One of the first acts of the Coalition government was a simultaneous increase in VAT and a cut in the level of corporation tax. According to the Treasury these amounted to approximately the same (£12bn to £13bn) in terms of revenue. But the VAT hike was disproportionately paid for by the poor and middle income earners, who spend more of their incomes on VAT-able goods. The corporation tax cut was an increase in the net income for firms. Taken together they amount to a transfer of incomes from workers and the poor to capital and the rich, the owners of firms.
This transfer of incomes from labour and the poor to capital and the rich is the essence of austerity policies. It is workers and the poor who are being made to pay for the crisis.
Read Post →
The rest of the world seems to be suffering from austerity fatigue – apart from the Berlin and Dublin governments (and London too – but no-one is holding it up as a model for anything).
The Department of Finance tells us that the deficit is improving. DoF reports that the general government deficit fell from €22.4bn in 2009 to €12.4bn in 2012. But it is widely known that the impact of bailing out bank shareholders and bondholders has had a hugely distorting effect on public finances. Unfortunately, DoF does not show these effects in the same release as the overall government finances, and you need to go to a separate database to get these data.
Adding the two together produces a measure of the underlying deficit, excluding both costs and revenues from the bailout. It is regrettable DoF doesn’t do this itself. The table below shows the deficit excluding the effects of the bank bailout.
|General Government Deficit
|Bank bailout net expenditure/receipts
|Underlying Deficit (excl. bank bailouts)
Fig.1 – General Government Deficit Excluding Effects of Bailouts for Bank Shareholders and Bondholders, €bn. Source: Department of Finance
Read Post →
The latest growth data confirm that Ireland went back into recession at the end of 2012. Despite all the talk about corners being turned, we find that economy is going backwards. GDP is lower than it was in 2009. GNP, which does not include the effects of movements in profits by multinational corporations, is back to where it was in the middle of 2010.
The ability of the Irish government to return to bond markets is being promoted as the main or even the sole criteria for the success of government policy. Strange that it is simultaneously said that this is a government debt crisis, and yet its resolution is measured by the ability to add to government debt.
The purpose of all economic policy should be the optimal sustainable increase in the well-being of the population. Instead, a return to the bond markets has become the overriding objective of economic policy. But this is itself unsustainable if the economy is contracting as the debt burden rises and the deficit widens once more.
On growth it is clear that the fall in investment remains the overwhelming source of the Irish Depression. GDP and GNP have contracted by €13.3bn and €11.9bn since the end of 2007 respectively. Investment (Gross Fixed Capital Formation) has fallen by €21bn. It is an investment strike which is responsible for the slump.
The national accounts are shown in the chart below from the end of the boom in 2007 to the end of 2012.
While investment has collapsed by €21bn, the fall in personal consumption has been about one third of that, at €7.1bn and the fall in government spending slightly lower at €5.6bn. It is repeatedly asserted that the performance of exports proves the validity of current economic policy. But while the increase in net exports has been very significant, this owes more to falling imports (which are treated as a negative in the national accounts) rather than rising exports. Recorded exports have risen by €11.7bn over the period while imports have fallen by €15.8bn – and there are question marks about how real these exports are.
Read Post →
The Office of National Statistics (ONS) in the UK have today released regional economic indicators. By bringing together data from a variety of sources, they provide a partial but very useful snapshot of where the economy under the jurisdiction of the Northern Ireland Assembly sits in relation to the British economy. The entire dataset is here and is very useful.
Below is the ONS chart on employment.
Oddly, repeated attempts to copy the full chart failed because the last item on the legend (directly below Scotland) kept dropping off. It’s Northern Ireland. In the chart, it is the orange line. Clearly, someone at ONS has a sense of humour.
Read Post →
Forecasts are never the most important part of Budget process. Although the natural tendency to focus on projections of growth and the deficit is magnified now by a widespread hope that there might be an end to economic misery, Budget forecasts are not the place to look. Currently the Department of Finance is forecasting that in 3 year’ time GDP will almost be back to where it started 8 years previously in 2007. But GNP will still be more than 4% below its pre-recession peak, according to official forecasts.
How much credence should be given to official projections? Not much. The chart below is taken from September’s Fiscal Assessment Report (FAR) and shows the level of forecast error for GDP in official presentations two and three years hence. The official record on forecasting GNP is much worse, as the domestic economy has parted company from the MNC profits-inflated level of GDP.
Likewise with projections of a fall in the deficit. To give just one example, not the most egregious, the Addendum to SPU of January 2009 forecast that the deficit would be eliminated altogether in 2012.
It seems more likely that Budget documents serve a political rather than a forecasting purpose. Certainly, no business presenting its accounts would be allowed to routinely begin its table of data from a year that is not yet complete- in this case 2012- without reference to the actual outturn in the previous year. Yet this is the norm (although it must be sad, not solely in Ireland).
Successive governments have long abandoned any notion that policy is about fostering growth but repeatedly insist instead that it is about reducing the deficit. Yet according to the Budget documents the deficit (General Government Balance as per EU accounting rules) was 8.2% of GDP. This is almost 1% of GDP higher than the deficit in 2008, when austerity began. According to the government’s own White Paper on estimates for 2013, without the further fiscal tightening of the Budget the deficit would rise to 8.9% of GDP. Any deficit which requires constant application of new measures can hardly be said to be on a sustainable downward trajectory.
Read Post →
It is unusual for ‘academic’ research published by the IMF to find its way into popular media. But this has happened to the latest World Economic Outlook where the IMF deals briefly with the issue of ‘multipliers’ that is, the economic impact of changes in government spending.
The short article has caused an usually high level of commentary among economists and commentators because the data suggests that the multipliers are perhaps more than double the level generally implied by official research and forecasts. Nobel Laureate Paul Krugman has commented that the research shows that, ‘the reason for the worsening outlook is that policy makers have gotten the basic economics wrong’. In Britain Chris Giles economic editor of the Financial Times has led a counter-attack by questioning the validity of the research. A string of other commentators have joined the debate on both sides, including a Greek finance minister.
The key point in the IMF research is that the multipliers are much higher than previously thought by leading bodies such as the IMF, OECD and others. ‘The main finding, based on data for 28 economies, is that the multipliers used in generating [IMF] growth forecasts have been systematically too low since the start of the Great Recession, by 0.4 to 1.2….’ Whereas the IMF’s (and others) own forecasts implied a multiplier of 0.5, the actual multipliers may be in the range of 0.9 to 1.7.
It is useful to assess why this seemingly arcane debate has created such controversy and why that is taking place currently.
Read Post →
Germany is widely regarded as the motor of the European economy. GDP grew by just 0.3% in the 2nd quarter of 2012 and is barely 1% higher than a year ago. The German statistical agency…
Read Post →
This article was originally published on Socialist Economic Bulletin on Saturday the 16th of June. The Greek general election on June 17 presents a clear political choice on whether to continue with the ‘austerity’ measures…
Read Post →