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Britain’s Closet Keynesian

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.

There is a school of thought that holds that commitment, not achievement, gives a policy credibility. For example, the Bank of England is committed to achieve 2% inflation “in the medium term.” Annual inflation has not been 2% at any time in the last six years, but it is possible that the BoE’s commitment has had some effect in lowering interest rates.