Wednesday, 21 March 2012

George Osborne’s Biggest Lie: There Is No Other Road To Recovery

While every minutiae of the Chancellor’s latest budget is picked apart by various commentators, I would like to focus on a point he made before getting into the substance of his latest budget. His third sentence to the Deputy Speaker was ‘there is no other road to recovery’.

If one is to look around Europe, with almost every major government pursuing austerity economic measures as well, you would think he had a point. But if we glance over the pond to our American friends, it is clear that the idea that austerity is the only way to engineer an economic recovery is not only misleading, it is a lie.

In 2009, a Democratic Congress and President Obama passed a stimulus package valued at anywhere between $850-$900 billion dollars in order to kick-start the U.S. Economy. 39% of this vast sum was apportioned for spending on infrastructure (note that this did not include selling off roads to sovereign wealth funds).

Rather than debating the merits of Obama’s stimulus package, here are the results on the country’s GDP:

Let us compare this graph to the U.K.'s growth over a similar period:

Note that since the Chancellor implemented his austerity driven policies, growth has never risen above 1.1.%, whereas in the U.S. growth has been (often significantly) higher than 1.1% in seven out of eight quarters during that period and has never gone into negative growth. 

Let us present another comparison between the affects of austerity vs. a stimulus package. This time, let us compare unemployment rates. First let's begin with the U.S.:

Here is the United Kingdom's unemployment rate over the same period:

While the U.S. unemployment rate has steadily decreased over the last two years, from nearing the 10% ceiling to verging on heading below 8%, unemployment has stagnated in the U.K and in fact sharply increased over the last three months. Furthermore, while the U.S. economy's base percent rate is similar to the U.K. rate, it has added 3.165 million jobs over the last 23 months. 

This evidence tells that not only is there another road to recovery, there is in fact a better road to recovery. 

Let us now compare George Osborne's 2012 budget to President Obama's proposed budget for 2012. Whereas the Chancellor has implemented a tax cut for the highest earners, President Obama intends to allow the Bush tax cuts to expire, which will see America's richest citizens paying a higher tax rate. 

The Atlantic points out that the President Obama wants to expand the stimulus program:

  • An upfront investment of $50 billion from the surface transportation reauthorization bill for roads, rails, and runways to create thousands of quality jobs in the short term.
  • Continuing to allow businesses to write-off the full amount of new investments.
  • $30 billion to modernize at least 35,000 schools and $30 billion to help states and localities retain and hire teachers and first responders. 
  • A new tax credit for this year focused on small businesses and that gives businesses that add jobs and wages a tax cut equal to 10 percent of wages added up to $500,000.

Where are similar ambitious attempts at engineering growth in the U.K. economy? Merely cutting corporation tax and the highest tax rate will not revive the British economy. In fact, it ties our Chancellor to that most foolish of economic ideas: trickle down economics.  

And most importantly, President Obama's stimulus would be followed by significant debt reduction. For every $1 in new revenue, there will be $2.50 of spending cuts. Therefore no-one can classify President Obama's plan as reckless spending, because all he is doing is giving the American economy a much needed jump start to ensure that it does not slip into another depression. 

It is worth remembering that when President Obama came to power, there was a great fear that America was on the verge of economic depression. Through his initial stimulus package and bailing out the auto industry, the President not only prevented a depression, he decreased unemployment and gave the country a decent level of growth, given the appalling economic climate. There is still a long way to go before America can say they have truly recovered, but the President's economic policies have set them on the right path.

So the next time George Osborne or any Conservative tries to claim that austerity is the only way to recovery, show them the raw economic data that proves them wrong.  

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