Tuesday, 18 September 2012

Does Austerity work?

As I return from signing-on for the umpteenth time, I have to wonder if austerity is actually working.

By austerity I mean attacking recession by cutting spending and raising taxes – the opposite of Keynesianism, which dictates that if the private sector isn't spending enough money to get the economy moving, the government needs to temporarily step in and supply the dosh.

The UK is committed to austerity, and [not coincidentally] they have seen growth deteriorate and unemployment rise.

In a way, our austerity policies are actually less defensible than those in some European countries. With the price of borrowing so extremely low here, capital markets are basically pleading for our government to borrow and get busy with temporary growth measures. That is not happening in Spain, Italy, Portugal, and Greece and for good reason: government debt in those countries is highly risky, and priced accordingly.

I sometimes wonder if the Bank of England is using enough data to make critical forecasts, it seems to rely on growth and output and not transactional data like supply and unemployment. It also holds a strong line with inflation, but how is inflation monitored? If it does not include all the data how can it correctly forecast?

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