Britain’s Closet Keynesian

Dec 22, 2014 Robert Skidelsky

As British Chancellor of the Exchequer George Osborne, the poster child for austerity, repeatedly misses his deadlines to balance the budget, he is starting to look like a closet Keynesian. What he fails to realize is that his attempts to cut spending during a crisis are undermining his effort to reduce the deficit.

LONDON – There is a growing apprehension among Britain’s financial pundits that Chancellor of the Exchequer George Osborne is not nearly as determined to cut public spending as he pretends to be. He sets himself deadlines to balance the books, but when the date arrives, with the books still unbalanced, he simply sets another.

Consider some fiscal arithmetic. When Osborne became Chancellor in 2010, the budget deficit – spending minus revenue – was £153 billion ($239 billion), or 10.2% of GDP. He promised that by 2015 the deficit would stand at only £37 billion, or 2.1% of GDP – equivalent to balancing current spending and revenue. Instead, the deficit for 2014-2015 is expected to be £97 billion. The conclusion of Osborne’s balancing act has been postponed until the 2019-2020 budget.

Osborne talks about the need to cut spending, but his actions say otherwise. Though he vowed to reduce spending by more than £100 billion by now, he has cut less than half of that, simply extending his five-year rolling program of cuts for another few years. As a result, Osborne, the poster child for British austerity, is starting to look like a closet Keynesian.

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Robert Skidelsky

Writing for PS since 2003
195 Commentaries

Robert Skidelsky, a member of the British House of Lords and Professor Emeritus of Political Economy at Warwick University, was a non-executive director of the private Russian oil company PJSC Russneft from 2016 to 2021. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.

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Margaret Bowker Dec 26, 2014

As Robert Skidelsky says, the Chancellor seems more of a realist, a pragmatist, than a closet Keynesian. I wouldn't have thought him a Keynesian by choice anyway, but actually doing the job and learning the art of the possible must adjust one's thinking. I quite like signalling and it does seem to work and create a feeling of reassurance, even globally. UK economic policy post election did focus for the first three years on reduction. Early 2010, people, myself included, were urging to no avail, that reduction should be balanced by a degree of appropriate stimulus. The previous government were going for stimulus as the main way forward and that was worrying with the rating agencies analysing the UK's financial position. So reduction came in with the new administration, but in late Spring 2013, voices rose up again arguing for a housing market stimulus, which happened and triggered the recovery. I think I'll settle for skilful, pragmatic debt reduction, even if it takes a few years longer.
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Peter Martin Dec 25, 2014

It helps if we look at the problem of deficit reduction from another angle. All spending by Government has to come back as taxes eventually (ie the so-called economic long run) providing they are finite. Wheres else can it go? So cutting spending also cuts taxation revenue. Especially in a recession, cutting spending and raising taxes is the economic equivalent of a dog chasing its tail. The harder it tries the more exhausted it gets without making any progress towards its goal.

The question of saving and imports shouldn't be overlooked. If money is leaving the economy to pay for net imports then it has to be replenished from somewhere and that can only be by government sustainably. If savers want to save, they become lenders. Government are then forced to become borrowers and spend that money to keep the economy moving.
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Robert O'Regan Dec 22, 2014

There is a possibility the Osborne has adopted the American "Tinkerbell" mentality; he believe as long as he wishes hard enough that his wishes will come true.
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John Brian Shannon Dec 22, 2014

Hi Robert,

I enjoyed reading this, "All policymakers are Keynesian to come degree," (or they're no longer employed in that role, one assumes) no matter their original intent.

It's too bad that the Europeans were bit by the austerity bug so badly. A little austerity could've been a good thing. A lot of austerity has become a very bad thing.

Hence, the recession was lengthened, which consequently made the strong EU economies stronger, while the weaker EU economies slipped badly by comparison.

Germany came out solidly on top.

Compared to the other EU states, strong Germany is now mighty Germany. And when compared to developed nations outside of Europe, Germany either continues apace -- or vis-à-vis the United States, has only slipped a little.

It's a very good thing that mighty Germany was around to bail out a half a dozen EU states, this recession. Or there may not have been much of an EU economy to save.

Imagine if Austerian economics had been used the way it was likely intended, not literally, but figuratively.

It would have enforced a re-prioritization of spending towards those spends where the best 'bang-for-the-buck' could be had.

That is one way to get out of a recession. Take the same budget money -- and spend it in ways that create the most wealth per euro (for governments, that means tax revenue) -- as opposed to just letting the money get spent almost randomly, as regards strict 'bang for the buck' guidelines.

Prioritizing spending to get the 'most for the least' is always important. But in advance of a recession, or as it begins to occur, that is the time to re=prioritize the often rather nebulous budget spending and remake it into the most efficient use of money possible.

Priority #1, #2, #3, etc.

"Which spending earns us the least amount of revenue, and which gains us the most? The better return is where we shall concentrate more of our spending."

(Without increasing overall spending, Keynesian-style)

In a nutshell, the European's should've re-prioritized their spending to gain maximum efficiency of money by reallocating less efficient money.

Best regards, JBS
- John Brian Shannon Dec 22, 2014
  
  typo:
  'to come degree'
  s/b
  'to some degree'
  
  Tx, JBS
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Michael Lochis Dec 22, 2014

Reducing Keynes like a supporter of just deficit spending, means even Ronald Regan was Keynesian. Keynes is more than deficit, is productive and social investments to restore well-being, not only the demand (as Regan did).
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