Twisting the facts: the government’s defence of austerity
Robert Skidelsky
Thursday, October 25, 2012

Yesterday in the House of Lords, I drew attention to three big Government mistakes which have stuck out over the past two and a half years:
The first was the belief that cutting down government spending would automatically produce recovery. I know the Government now claim that they never believed anything so simple or idiotic, but they did, and there is plenty of evidence to prove it.
The second has been the Chancellor's failure to distinguish between current and capital spending. This has made the deficit seem more dangerous than it was. The prime example of this blind spot was the £50 billion cut in capital spending.
The third was the Chancellor's belief that without a severe fiscal contraction Britain would go the way of Greece: that is, interest rates would go through the roof. This was doubly wrong. First, with an independent central bank able to buy government debt in whatever quantities were needed there was never any chance of gilt yields rising to the levels experienced by Greece, Portugal, Ireland and Spain. Secondly, and perhaps even more importantly, a reduction in the cost of government borrowing is no guarantee of a reduction in the cost of commercial loans sufficient to offset the collapse of the private demand for loans.
Lord Newby, the Liberal Democrat Treasury spokesman in the Lords, responded to the third big mistake with a counterfactual:
I find it almost incredible to think that if the Government had not been seen to get the fiscal position under control, interest rates would not have gone up. Even if they had not gone up to the levels that they are at in Greece or Spain, a single percentage point increase in interest rates...costs mortgage holders in the UK an extra £12 billion a year.
But what has actually happened to mortgage rates? The figure below compares UK mortgage rates to bond yields.
Source: Bank of England
Over the last year, by the time the Government’s austerity programme was in full force, both tracker and variable rate mortgages offered have gradually been rising in relation to falling bonds yields. As I have been saying for some time now, the benefits of low government borrowing rates are not being transferred to mortgage holders.
I also asked Lord Newby about the puzzle of productivity:
There is a puzzle, which is that unemployment has been static in the past few months, and even falling slightly, despite the fact that output is flat and the economically active population has increased by 550,000 over the past two years. You would therefore expect unemployment to have increased. Why has it not done so? That is the puzzle…part of the answer at least must be that productivity - that is, output per hour worked - has been falling. As the Guardian put it, "it now requires many more of us to labour away to churn out the reduced volume of stuff". Falling productivity is just as serious a problem for the economy as rising unemployment, and a greater problem in the longer term.
The Prime Minister claims that 900,000 extra jobs have been created in the private sector over the past two years. That is not of course the net increase in jobs, given that 400,000 jobs have been lost in the public sector. The net increase in jobs has been 500,000.
Can the Minister tell us how many of the net gains in employment are full-time? Labour market statistics suggest that more than half of them are part-time or self-employed.
The point is this: if a lot of the private sector job creation consists of part-time, low-skilled jobs at the bottom end of the service sector, it would explain the decline in productivity that limits the rise in unemployment. But it is a poor omen for that vibrant, high-value economy that is supposed to secure our future prosperity.
Lord Newby did not have the figures to hand, but he did have something to say about self-employment and part-time work:
There is a false assumption that working for oneself or working part time are somehow second-class things to do or things that people do not necessarily choose to do.
To this the answer is obvious. Some people do choose self-employment or part-time work. But this choice was available before the recession, and many people who are now self-employed or part-time chose not to take it. Only when the recession removed the opportunity for full-time work did they take these options. It is not that I think these options are second best; when they had the choice, people decided that they were second best. And if people didn’t believe there was a market for their business when the economy was healthy, why should we assume that they are more confident now? The proportion of part-time workers who want, but cannot find, a full-time job has doubled since the crash, to 18% - that’s 1.4 million who are under-employed. In the past two years alone this figure has gone up 4%. The statistics don’t show how many people who are self-employed want a full-time job, but it is difficult to believe that there is not a similar trend.
The fact that self-employment has risen is a testament to the resilience of the British workforce, but it is not the sign of good economic policy – unless of course the recession is part of the government’s plan to encourage small businesses.
As for today’s quarterly figures, which show that Britain has “officially” come out of recession, I can only repeat what I said in the speech:
When an economy is crawling along the bottom, any small wave is likely to lift our spirits. Over the past three quarters - that is, the past nine months - the economy has shrunk by 1%. Even if, as now expected, it achieves a positive growth of about 0.8% this quarter, that still leaves it in roughly the same place as it was a year ago. Moreover if, as commentators suggest, this boost is due to the Olympics, it will be in the nature of a windfall. However much we may rejoice in the achievements of our athletes, 28 gold medals is not enough to turn the British economy around.