George Osborne was on the telly today boasting that his strategy of austerity appeared to be working, the evidence being an unexpected rise in GDP in the second quarter of the year.
He was wise enough to urge caution, aware that GDP is a slippery customer that can go down as easily as it goes up. But the boast was loud and clear: his plan for economic recovery is the right one and his opponents were wrong.
At the heart of his plan is a reduction in public spending – austerity – so let’s have a look at the numbers and see how they might have affected last quarter’s gross domestic product (GDP).
In 2010/11, the year before George became Chancellor of the Exchequer, public sector current expenditure was £658,757 million. After two years in the job this had dropped to £657,479 million. (HM Treasury: page 13).
So the austerity programme has delivered a reduction in public current account spending of £1,278 million, or less than 0.095% of annual GDP.
If we look a bit further down the table on page 13 of the Treasury document we see that Total Managed Expenditure (which includes capital spending) tells us a different story from the one above.
Total Managed Expenditure was £720,468 million in 2011/12 and £675,255 million in 2012/13, a reduction of £45,213 million, or around 3.2% of annual GDP.
So austerity has been successful in reducing government spending by a something between a small and a very tiny amount of GDP. Does this mean that George is right to claim credit for the recent increase in GDP?
Gross domestic product is a measure of the amount of money flowing through the economy as people buy and sell stuff. Recession, by definition, is a reduction in this flow of money.
Austerity is a reduction in government spending, which means a reduction in the amount of money flowing from government into the economy, which means austerity can only make the recession worse. So how on earth can the Chancellor claim credit for the recovery when his spending cuts must have had the opposite effect?
Maybe he’s been cutting taxes, which would leave more money in the economy where it might get spent on stuff, increasing GDP?
Total tax receipts in the year before George took charge were £447,159 million. In his first year as Chancellor these rose to £466,634 million, and rose again to £469,777 million in 2012/13. (HMRC: page 3)
So he’s taxing more than the previous government to the tune of c.£23,000 million a year and spending c.£45,000 million pounds less, which means he’s reducing the amount of money in the economy by c.£68,000 million a year, which is more than 4.8% of annual GDP.
Whatever is responsible for the economic upturn it most certainly isn’t George Osborne. If his strategy has had any effect on GDP it has been negative.
I don’t understand how the man can stand in front of a camera and keep a straight face while he tells us that his austerity plan is responsible for the the economic recovery (such as it is).
If he truly believes what he’s saying, then he’s an idiot. If he knows that he’s talking nonsense then he’s a liar.