Wednesday, April 07, 2010

Gordon Brown is not a true Keynesian

A budget deficit of 12% of GDP is apparently "right" so says Gordon Brown. This is a Keynesian view apparently.

Well setting aside whether Keynesian is right or wrong (it's wrong, but that's for another day), Allister Heath in City AM has written today about how this was never Keynes's view:

John Maynard Keynes, whose work is often cited as justifying our fiscal incontinence, would in fact have been horrified at the scale of the deficit and our over-sized state sector, which the OECD puts at 52 per cent of GDP. Keynesians argued that governments should allow the budget to go into the red in a recession by a few percentage points of GDP, with 3 per cent usually the maximum – perhaps 4 per cent if things were truly desperate. Nobody ever claimed one could prudently rack up three or four times that level – and crucially, proper Keynesians supported budget surpluses in the good years. Brown’s constant structural deficits even at the height of the bubble would have been anathema to them.

So even if you believe in big spend ups during recessions, what Brown has done is THREE TIMES the scale of deficit spending that Keynes himself argued, and that during times of growth, budget surpluses should be run (which would then pay down debt). Gordon Brown only ran budget surpluses twice as Chancellor of the Exchequer, primarily due to inheriting a prudent Tory budget in 1997 and windfalls from selling mobile phone radio spectrum.

Furthermore, cutting budget deficits is positive because it:
- Reduces transfers from taxpayers to foreign sovereign debt holders;
- Reduces the crowd out of the state in the debt markets, reducing the cost of debt to the private sector.

In addition, the best way to do this is to reduce consumption, not increase taxes and not reduce spending on the few areas of positive economic expenditure like roads (which in the UK are grossly underfunded).

One European Commission survey of 49 countries that cut their deficits found that 24 of these fiscal consolidations promoted growth even in the short term – even when deficits were considerably lower than 12 per cent of GDP. The higher the deficit, the more likely that cutting it will boost growth immediately – a conclusion implied in a February 2010 study from the European Central Bank which found that the crisis has caused markets to punish irresponsible fiscal behaviour even more severely than before.

It’s quite simple: we need to cut the budget deficit as fast as possible by reducing spending. That, rather than messing around printing yet more money, would provide the best, most effective stimulus for the UK economy.

So in short, Gordon Brown has screwed up big time, the UK is only avoiding Greek like concern because UK governments don't default, UK savers have had their cash assets devalued as the pound drops, and the UK government hasn't lied like the Greeks.

To treat Labour as if it has been a profound saviour of the British economy is a joke - it has wasted money, running deficits during the good years and is now running up public debt that will hold down the UK economy for many many years.

It is a good enough reason to kick Gordon Brown out in utter disgrace.

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