The austerity gospel

By John Rapley

Seek ye first a balanced budget, and all other things shall be added unto you. Call it the austerity gospel, and it has swept the world in a crusade of budget-cutting.

Some countries, like Jamaica or Greece, can't avoid it. Their purse is empty and their credit tapped out, so if they tried to spend their way to recovery they'd have to borrow from loan sharks - I believe the polite term is "high-yield bonds" - at rates that would choke off private investment. In any event, stimulus in such places would be like giving an obese kid another mouthful of pudding in the hopes he'll then bounce up and win the sprints.

Other countries can get away with it because their finances were sound to begin with. The Canadian government delivered its budget last week, and it was prudent without being overly painful. Canada is bringing its deficit back to zero over the next couple of years, but because Canadian governments have been careful for years, the nation's finances are in pretty good shape (bolstered, it has to be said, by a windfall of resource revenues).

But then you get countries like Britain, which also released its budget last week. Its future looks grimmer by the month. The coalition government which took office two years ago committed to reducing the debt. The chancellor of the Exchequer went so far as to stake his reputation on maintaining the country's AAA credit rating.

As the country dipped in and out of recession, the government cut spending. Adopting a warmed-over Thatcherism, it insisted that public-sector prudence would free up money for private investment. It hasn't worked that way.

With Britain's main export market, the European Union, in recession, there was insufficient demand for British output to support growth. Meanwhile, government cutbacks worsened the recession. Economic contraction has consequently driven the debt-to-GDP ratio higher.

Last month, Fitch stripped Britain of its AAA status, underscoring the failure of Britain's policy. In response, the Conservatives promised, yes, more austerity. And if that's not depressing enough, the opposition Labour party has promised a Keynesian magic wand which will costlessly restore Britain's golden age without acknowledging the structural problems that model bequeathed.

A big part of the problem with the austerity gospel is that it confuses structural reform with cost-cutting. Admittedly, structural reform can look like austerity, as inefficient units are closed and non-performers are let go. But in fact, when it's done properly, reform that cuts fat allows the fuel to go to muscle - whether in the form of promoting performing at the expense of non-performing civil servants, or allowing dynamic firms to take over from sluggish ones.

Jamaica's mistakes

Jamaica is not immune to this sort of error. Austerity programmes tend to slash the government spending that supports growth, like infrastructure, while leaving the real sources of the problem, such as low productivity, largely untouched: a bit of wage-freezing, perhaps, but no actual change. After all, better roads and computerised classrooms don't vote, but political appointees (who seldom do much for public-sector productivity) do. Politicians love to grab headlines by cutting spending, but too rarely do it well.

This problem is ubiquitous. The much-vaunted US sequester has cut government spending. This has kept interest rates down, supporting a modest private-sector recovery. But the sequester is slashing discretionary spending, like repairs to America's crumbling road network, and leaving the structural problems, like Medicare and Social Security, intact. The latter now consume roughly half of the US's non-debt spending, and will inhibit future growth.

So the US will recover, but its future growth rates will not likely reach those of old. Meanwhile, its economic foundations will remain fragile, like those across the West. Of course, by then, the politicians will be retired.

We'll line up to blame them then, but it's not all their fault. We need leaders with vision and courage, but we get what we deserve.

John Rapley, a political economist at the University of Cambridge, is currently on a visiting professorship at Queen's University in Canada. Email feedback to columns@gleanerjm.com and jr603@cam.ac.uk.