Keynesianism vs Austerity – responding to the crash of ’08

In the final Prime Minister’s Questions before the 2010 General Election, David Cameron said the following:

“As this is the last PMQs this parliament it is the last chance for this prime minister to show he is accountable for the decisions he has made… This prime minister would wreck the recovery by putting a tax on every job. This government would wreck the recovery.”

This article will examine a variety of economic factors and compare how the Brown/ Darling response to the crisis affected the economy compared to that of Cameron/ Osborne.


Firstly, a brief description of each of the two approaches:

Brown’s key approach was the bailout for the banks. In a classic Keynesian response, it was Labour’s understanding that the deficit would be dealt with in time, but the current priority was for the government to spend in order to fix the problems of credit for businesses and unemployment. The package had three main parts, but it essentially boiled down to £500bn of support for the banking sector. Other measures included a new top tax rate of 50p for income over £150,000, and a one year decrease in VAT from 17.5% to 15%.

Cameron’s entire plan was different as he worked on an entirely different economic model. For him, the key to economic success was to restore the global market’s confidence in the UK by a concentrated effort to end the government’s spending deficit (originally by 2015; currently aimed from 2019). In a speech on the 28th May 2010, Cameron highlighted his three key areas for economic change: firstly, ‘liberalising the economy’ through cutting red tape and keeping taxes low for businesses; secondly ‘modern support’ of the economy from the government – this included high-speed rail connecting the country, Gove’s encouragement for academies and free schools, allowing schools better to provide skills for children, and IDS’s welfare reforms, as it was seen that overly generous benefits were a disincentive for people to get back into work; finally, he wanted to ‘rebalance the economy’, and although detail was less precise in this section, Cameron pointed out that the economy was reliant on too few sectors, based in London and SE England, and he wished to ‘encourage’ technology industries throughout the UK. Important tax changes included gradually lowering the corporation tax rate from 28% to 20%, reducing the top rate of tax from 50p to 45p, and an increase in VAT from 17.5% to 20% (despite promises not to do so).

A series of graphs will now be examined relating to various economic factors, and three sections will be highlighted in each: the crash (in orange), Brown’s response (red), and Cameron’s response (blue). It is important to note that in economics, nothing is ever as simple as it seems, and a single graph is not definitive proof of anything. However, if enough areas show the same trend, it can be assumed that the correlation might start to hint at causation.

Graph of Gross Domestic Product 2004 – 2014

GDP chart 2 coloured

Here we see a sharp drop in GDP during the crash, a recovery under Brown, and a mild decrease then mild increase, overall flatlining, under Cameron.

Graph of output per job

Output per job coloured

This graph charts output per job, and shows two years of decline when Cameron takes over.

Graph of consumer confidence

CC Index colouredHere, again, Brown’s response succeeds in boosting consumer confidence, which drops again under the first few years of Cameron, eventually rising again in 2013.

Graph of UK manufacturing output

Manufacturing

Considering that one of Cameron’s key points was that the economy was too dependent on sectors like finance, and need more manufacturing, above graph is quite damning. Even the growth in 2013 peaks at the end of Q1 2014 and heads down again.

At this point, readers should be getting a clear picture – the crash causes a slump, recovery sets in under Brown/ Darling, and the recovery stops under Cameron/ Osborne’s austerity. We have already seen this happen in GDP, job output, consumer confidence, and manufacturing output, but this same pattern is also found in:

  • Real earnings growth
  • CPI inflation
  • Monthly mortgage approvals
  • Business volume expectations
  • Industrial production output
  • Construction activity
  •  Business investment

There are several sectors where there has been a steady picture with the two governments, for example import/export balance, but almost no examples of the austerity measures being more successful than the Keynesian ones. Claims by Osborne that the treasury in bringing in more tax than ever are deliberate half-truths, concealing the fact that this is only true in terms of a whole number – when inflation is factored in, or when measured as a percentage of GDP, this is no longer true. A single claim in favour of Cameron/ Osborne’s economic strategy is that the percentage of adults in work is approaching a record high, although this was following a trend that been climbing since 2000, and does not factor in the proportion of people in part-time work.

Once again, Cameron’s claim:

This prime minister would wreck the recovery by putting a tax on every job. This government would wreck the recovery”

In light of the information above, readers can see that this claim is perhaps not as true as Cameron would like us to believe.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s