Aditya Chakrabortty wrote an article for the Guardian yesterday in which he included this chart:
The data comes from the IMF. It shows the planned proportion of GDP to be spent by the governments of the UK, Germany and USA over the next five years, with some historic time data to give the plans some context. As Aditya pointed out, it is the plan of the UK that is quite so extraordinary.
Between now and 2017 the Coalition is planning to cut its spending from about 45% of GDP to under 40%, a figure slightly lower than that in the USA. And remember, it's going to do this at a time when growth is going to be low, as we now know for sure since almost everyone agrees that the impact of the financial crisis will last until 2018.
Aditya is, of course, right to highlight just how aberrational these cuts are. No one has tried to do anything like this before in history; not just here, but anywhere. And Aditya's right to also note that non one can as yet get their heads round just what the impact of this will be on government services and those who rely on the state. But I think there's something Aditya did miss out on - and that's to forecast the impact of this in the light of the IMF's new realisation that right now changes in government spending have a very strong multiplier effect. As they've acknowledged, that effect could be as high as 1.7 times the spending, or cut. I explained what this means, here.
So let's explore this. Each year for five years the government is going to cut what it spends by 1% of GDP. That's near enough, £15 billion a year. In five years time £75 billion will be taken out of the economy each year compared to now.
With a multiplier effect of 1.7 - and there's no reason to think this will change over the next few years as we don't expect any significant increase in growth over that period - that means that in current terms GDP will be 8.5% less in 2018 than now.
Note what I am saying: the government is planning a deliberate, persistent, economic recession at a scale that looks rather like it's their intent to turn it into a depression over the coming five years.
And what will happen if we cut the economy by 8.5%? Of course the poor will be much poorer: that's the only way this result can be achieved. But the impact will be much broader than that. If you cut GDP by 8.5% you can only do that by crashing investment. There is no other way to do it. Cutting investment has a multiplier effect higher than all other multipliers. And it also directly impacts jobs: and this is the key point here.
It does not follow that cutting GDP by 8.5% cuts jobs by 8.5%. Labour only makes up 55% or so of GDP. But given that it is the biggest part of GDP you can't cut GDP by the extent planned as a result of cuts of this scale without impacting jobs either directly, because government spending is cut, or because the recipients of that spending are cut as benefits and other costs are massively scaled back, or because investment is cut.
And since in that environment people will save because they will be living in fear and so business, seeing no prospect of growth, will also not invest, whilst at the same time we can hope from no salvation from overseas where the Eurozone shows no sign of coming out of crisis, then given that none of these other factors that might stimulate GDP (and they along with government spending are the only things that can stimulate it) the impact of cuts is bound to result in significant job cuts.
The UK labour force is roughly 30 million right now. Cut it by a number a little less than 8.5% - let's call it only 5% to be generous and to reflect the part of the fall in GDP that must fall on labour, and maybe 1.5 million or more people will lose their jobs.
In 2009 I said we'd see unemployment of 4 million, at least, in this country if the Coalition got their way.
I still stick by that forecast.
And not one iota of this is necessary. This will be economic havoc imposed by choice, not need. Which is precisely why we need to protest long and very hard about it.
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Richard,
You have educated me in so many things and pointed me towards so much more I needed to know that I’d like to offer you this link received from an American friend.
http://www.nytimes.com/2012/10/14/opinion/sunday/the-self-destruction-of-the-1-percent.html?pagewanted=1&_r=1&emc=eta1&
The piece is quite long but, I believe, worth the effort.
Thanks, and agreed
I think the answer in all of this is that the govt. will run down the public sector, or as they might say ‘boost productivity’ by doing ‘more for less’, and when everything is so bad that people are spending fortunes on car repairs for rutted roads, when old people begin gassing themselves rather than sell their house for really poor care, when bins are emptied once a year, when all public workers have gone through their own tailored internal devaluation with respect to wages rises versus inflation, lo and behold, who is there riding like knights in shining armour over the horizon…it’s all those lovely private companies with their commercial confidentiality, redundant middle management (or panopticon operatives…I’ve copyrighted that one so no stealing…), and their army of top management ‘looters’, ready to bleed us dry with their tollbooth charges..and it will all be over. Smash and grab all in one term…largely thanks to the entryist Orange Bookers. When Vince said my heart beats on the left, he’d just been catching up on basic physiology. Nothing more. Likewise, I know Mark Littlewood looks thick but he’s a man with one idea and people like him can’t let go. People will look back on the 2010 election as era-defining but only until the British Revolution of..mmmm let’s say 2024.
Stocking up on the tins of beans even as I write this….
You can’t blame it ‘largely on the Orange Bookers’-the Lib Dems. It is the Tories who are doing it. If Labour hadn’t signed up to the neo-liberal agenda (which I am told is the Orange Book approach) and regulated the banks, we would be in different situation.
The LD rationale in 2010 was to moderate the Tory line and argued it was easier in coalition than outside. If they had not done so, Cameron would have called another election within months and probably won. It what usually happens when an election is close and another follows. If we had PR the situation would very different but given a chance to bring in a moderate reform, what did the population do?
If one believes in conventional economics-all three parties do-then the rhetoric of cutting seems to be the only remedy. Labour’s line for most of the time since the election has been to say “we would cut more slowly”. Only recently have we seen the beginnings of Keynesian/Krugman argument. They still have a lot to do. Can’t blame the LDs for that, The Greens seem to have a better economic policy as well as a convincing leader. With PR I would probably vote Green first.
I had a vague knowledge of alternative economics before and I’ve researched a lot since. Tribute to this blog for its public education function and boo for most of the media for not doing so.
I didn’t realise, in 2010, how far the Tories had gone in trying to be US republicans. I don’t think a lot of people did. This is not to excuse how far the LD have gone in supporting them. They have been marginalised by the their partners and the time has come to realise the austerity experiment has failed, and if they pulled out, it would be the best thing they could do for their country. There are LDs who are not Orange Bookers, I presume. And maybe Labour could make common cause with them and articulate a clearer alternative?
That chart is very misleading, given that on the IMF figures, the average public spending as a % of GDP over the pre-crisis labour govt period (1997-2007) was 38.6% so the current government is only aiming to get back to that level. And the IMF figures assume average nominal GDP growth of 4.4%, which should mean significantly more jobs in the private sector, and which means that public spending is still growing albeit at a slower rate than GDP (1.8% p.a.).
That said I do tend to agree with you that government should be using the low interest rates and borrowing to fund infrastructure and energy reduction projects!
The chart was meant to indicate relative change
It does that despite your criticisms