Late, as usual, but writing in the Financial Times on Wednesday, Chris Giles makes a very strong case against the view that austerity is what is hurting the UK:
No sensible person thinks deficit reduction had no effect on growth, but if austerity was to blame for the shortfall in nominal and real growth, you would expect to see it reflected in weaker than expected private consumption. Spending cuts and tax rises reverberating around the economy would hit household incomes and spending more than expected. You would also expect stronger than expected exports as companies put more effort into sales abroad than in the austerity-ravaged domestic economy. This pattern is indeed evident in Spain.
But the UK does not follow the pattern. In 2012, nominal private consumption growth was exactly as the OBR forecast in December 2012, faster than the late-2011 prediction and almost spot on the estimate in the 2010 Autumn Statement. A similar pattern exists after adjusting for inflation.
Instead of households tightening their belts more than expected, by far the most important cause of stagnation was the terrible export performance. Had foreign sales last year performed as the OBR forecast in late 2011, nominal gross domestic product would have been £13.6bn higher by the fourth quarter and the annual growth rate would have been 4.9 per cent not 1.3 per cent. In real terms, the export shortfall is the difference between growth of 2.7 per cent and the 0.3 per cent achieved.
For convenience, here is a chart showing projected and actual exports for the last three years:
Given that the EU constitutes 46% of Britain’s trade revenue, it is safe to say that the tight money policy followed by the ECB, that has been ravaging the economies of of southern Europe, and is even starting to show signs of becoming a liability for the German economy, is becoming a serious drag on the British economy.
Giles makes an excellent recommendation:
If Mr Osborne wants to sort out the deficit he will need to get nominal spending growth back to its historic average of about 5 per cent a year. If ever there was a time to set the BoE such a target, this is it.
George Osborne rejects the advice.