Tuesday, January 29, 2013

Austerity is an outcome not a policy. We need a new language and properly integrated macroeconomic leadership.

I am surprised at the lazy way that politicians and commentators continue to suggest that austerity is a policy not an outcome. It is the latter. No sane leader would wish to impose austerity on his people. But, as in the immediate post war era, at times Macroeconomic realities dictate that there has to be restraint, especially more closely to match government outgoings to government income. A combination of expenditure cuts and tax rises can cause widespread hardship - increased unemployment reduced family purchasing power, and, especially, low or even negative growth. This is a vicious circle within which growth is a casualty of reduced government spending and reduced personal spending which is the direct outcome.

To break the vicious circle the classic Keynesian solution is to increase infrastructure investment. This utilises unused capacity (especially Labour) to create necessary and long-term contributory assets such as roads, railways, power generation capability and the like. Clearly this comes in part from deficit financing - although public/private partnerships can allow a proportion of the capital to come from the private sector, e.g. from Pension Funds. And of course employment is created in the construction phase of the investment which reduces welfare spending and leads, through increased personal consumption, to a return to growth.

We need a new language to describe an integrated Economic policy which matches a measure of fiscal probity with a major emphasis on infrastructure investment. Austerity is not the word! And we need a realistic planning timescale of at least five years during which Government sticks to its plan! The eventual outcome from the restraint (on the one hand) and the post war infrastructure recovery programme (on the other) of the austere 1945-1951 years was positive. More of the same is needed now.


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