Tomorrow, the United Kingdom heads to the polls. The BBC found the economy to be the top issue (of 3, with the NHS and immigration) amongst voters.
Nobel Prize winning Economist Paul Krugman published The Austerity Delusion in The Guardian last week, with similar commentaries “going viral” .
In this two minute takedown, here’s the counterargument — the policies they’re not discussing.
The basic question in this is what type of expansionary fiscal policy to go for (both cost the taxpayer, now or later) — more government spending or lower taxation. Krugman’s article argues for more, not less austere public spending.
The Tories chose tax cuts — the opposite. Cutting top rates for wealthy (read: wealth creators, investors, job creators) and raising tax-free thresholds for people on lower incomes. The big thing this changed was how worthwhile it has been to work (coupled with a cap on welfare benefits) — the quiet retort to the anti-austerity brigade.
There’s evidence, certainly at levels of lower unemployment (like the UK now — we’re around the pre-crises unemployment rate) that lowering taxes does more for growth than government spending. The “multiplier” talked about in this article (my £1 spent is another person’s income. They then spend it… and so on) gets smaller with falling unemployment rates.
I’d say its too late to adopt the alternative (keep taxes higher, spend more) and inappropriate since we’re out of crises and into a recovery. That said, I would strongly support heavy Government investing (borrowing) in supply-side infrastructure like housing construction, roads, rail (HS3 linking up the northern cities, Crossrail) and broadband because that strongly impacts long run growth. These give helpful “£X out for every £1 in” equations.
Krugman mentions taxes 8 times in a 5000 word essay. Economists argue and regularly produce conflicting evidence — I’d love to hear his thoughts on the ‘other end’ of fiscal policy.
