Austerity vs Growth

Congratulations to M. Hollande, the new President of France.

One of the things M. Hollande stood for was growth over austerity: “You, the French people, are going to vote to give Europe a new focus on growth, on progress, on the future.

So what’s the issue here then…from a purely outsider, non-economist point of view, of course.

Ideal world: Whatever the government receives in tax incomes, it spends on government programmes, infrastructure and welfare, depending on the policies of the government of the day.

During the early noughties, interest rates were cheap, which meant money was easy to borrow. Not only did the ordinary man borrow lots of money, so did companies and whole countries, to lavish us with tax cuts, infrastructure programmes, and (in the case of Greece), vastly expensive Olympics.  Thus recently, government spent more money than it was getting in.

With the credit crunch, recession and banking crises, the economy of the world has taken a turn for the worse. Two things are now affecting government policy:

Firstly, the interest rate has jumped significantly since the banking crisis of 2008. These debts are now more expensive. Just as we’re all having to pay more money on credit card and mortgage interest payments, so are companies, and, you guessed it, whole countries.

As such, more of the government’s monthly spend needs to go just on paying the interest of these debts. That’s less money that the government can spend on welfare payments and building new roads and schools, at a time when more people are claiming benefits and more spending on roads, schools, hospitals etc. would give many people a job at a time of higher unemployment.

Secondly, the government needs to reduce spending to bring it to more or less equal with tax receipts. (In reality, we need to get more money in than we spend out, so we can actually pay off these loans, as opposed to just paying the minimum balance on our collective credit card and waiting 80 years for the debt to disappear!!).

Austerity means the cutting back of government spending to “only spending what we can afford”. Thus building programmes, government giveaways and public-sector jobs are all cut back.

The idea is simple, and again we can use the analogy of Mr. Everyman: if we’re earning £1,000 a month, our spending has to be less than this, so we don’t run up more debt, and hopefully pay off our existing debt. Of course, this cut in spending means we get less of what we want, getting cheaper clothes, looking for better deals on food, going without that holiday. But if it means sorting out our debt, it has to be worth it in the long run, right?

The problem is people are running out of patience for the long run. We’ve done our suffering, made cut-backs. Things aren’t any better. It must be the politicians’ fault, why aren’t things any better?

When governments spend money, we tend to receive it, whether it be through wages in public sector jobs, construction contracts on that new school, tax freezes or various benefits. With the government spending less, there is quite simply less cash flowing around the country – because we’re not spending all that loan money we no longer have.

Since we – the royal we, both as individuals and businesses – are receiving less cash, we’re spending less cash, so businesses are losing out, cutting their staff and paying less corporation tax. And since we’re receiving less cash, and less people are receiving wages due to job cuts, we’re paying less tax. So not only is the government trying to spend less anyway, not only are more people claiming welfare payments, but they’re getting less tax in. Which prompts governments to cut more. Which only makes the cycle getting much much worse. Just ask Greece.

If we can find a way that businesses thrive despite less money flowing around the economy, we can break the above cycle. Businesses can hire staff, who then don’t have to claim benefits and can pay tax. More people with incomes means more money flowing around the economy. We would be, in economic terms, into a period of growth.

M. Hollande won his presidency on claims that he wants to raise the minimum wage, hire 60,000 more teachers and lower the retirement age from 62 to 60 for some workers. This will undoubtedly put more money into France’s economy. But it will undoubtedly cost more money. Either France will be paying back her debts more slowly, or even worse will need to borrow even more to be able to afford this plan.

It’s a gamble. In theory, this spending should get more money flowing around the economy. But there’s some big “Ifs”. These programmes should, in theory, get more money flowing around the economy. If he can borrow the money. If the banks that lend the money don’t get spooked and ask for it all back. If it doesn’t affect the rest of the Euro. If the extra money stays in France and isn’t spent in Germany, Spain, et al. And as long as the extra borrowing costs doesn’t send France into the slippery slope many indebted people find themselves in.

Our own George Osborne believes changing course is a bad idea. Danny Alexander said last year that the Government would, come what may, stick to it’s deficit reduction plan. For them, the gamble is too great.

This is, after all, why we elect politicians (and arguably, civil servants) – so they can analyse the case and make a decision for our benefit. But around Europe a gap is growing, between the decisions politicians are taking for us, and the decisions we want them to take.

In Greece, the moment has arrived where that gap is too big, where revolution is in the air, where the pain is too much and the people are demanding a different course, come what may.

I don’t envy those around the world who has to decide between stimulating growth or sticking with austerity, especially when no-one knows how long recovery may take in either instance and when every country’s decision affects many other countries. There appears to be no magic bullet that will give us both growth and austerity; the two are almost mutually exclusive.

So which path do we go? For growth, or for austerity? As elections slowly come around, especially in the US later on this year, the world speaks, and votes.

Editor’s Note: Apologies once again for the delay in my most recent blog – I’m going for my 3rd degree Black Belt in Tae Kwon Do on Sunday, plus some of my students are going for their first degree Black Belt, so as you can imagine life is a tad hectic at the moment!

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