[OPE] Willem Buiter and the British Budget...

I was just reading Buiter's FT blog.

Although he praises Mr Alistair Darling in trying to clean up the "mess" in public finance left by Gordon Brown, Prof. Willem Buiter is quite scathing about the latest budget of the British government ("Darling is doing his best to clean up Brown's mess", FT April 22, 2009) and concludes:

"Under the best possible scenario, taxes will have to be raised and/or public spending cut on a permanent basis by between 5 and 6 per cent of GDP to regain fiscal sustainability. The necessary permanent fiscal tightening could easily be larger. The pain will be widely felt. The ambition to bring British infrastructure back up to the level it achieved at the end of the 19th century has been postponed by another quarter-century. Education and health will suffer. The long-term pain of higher taxes and lower public spending is not the result of public debt and deficits incurred because of a war fought by a united nation against a hated external enemy. It is the result of an economic civil war, a massive systemic peacetime economic failure, with a large domestic component. It is therefore not clear that the necessary social and political cohesion - readiness to accept joint fiscal burden-sharing - will be present. If the necessary fiscal tightening is not forthcoming because different groups and vested interests are engaged in a war of attrition aimed at shifting the fiscal burden to the other guy, markets could easily panic and Britain could face an emerging market-style "sudden stop", with the rest of the world withholding financing from its public and private sectors." http://blogs.ft.com/maverecon/2009/04/darling-is-doing-his-best-to-clean-up-browns-mess/#more-1440

Probably Prof. Buiter is thinking of the effect of the last recession on UK - from 2000 to 2002, foreign direct investment into the UK (mainly from the EU and USA) dwindled to a third and then to less than a quarter of the annual level it had previously reached, at the peak of the boom.

It looks like that the Tories, if they form the new government, will be engaging in a furious round of cost-cutting; but this is not likely to endear them to the public either; after all, it was the UK public service that accounted for a lot of the new jobs previously.

It's a political economy not so much of "who loses and who gains", but of "who loses the least", a game of "shifting the fiscal burden to the other guy" as Prof. Buiter says. It brings to the fore a whole new crop of politicians who must somehow justify the fiscal surgery to the general public and defend the policy. There's very little scope in all this for Leftist "warm fuzzies". When there's a lot of money around, politics veers to the left, but when there is little money, it veers to the right. Similarly, when Mr Obama cultivates the "conservative defenders of civilization" he is merely anticipating what future policy directives will require the leaders to do.

How much is 5-6% of UK GDP? The UK GDP is just over 2 trillion pounds so it's about 125 billion pounds max (= approx. US$180 billion). For comparison, the UK National Health Service, which employs circa 1.6 million people had a total annual budget in 2007/2008 of about 90 billion pounds (about US$130 billion). http://www.nhs.uk/NHSEngland/aboutnhs/Pages/About.aspx

So on Prof. Buiter's figures, even if hypothetically you shut down the whole NHS completely, then you'd still need to trim state budgets by another 35 million pounds, which is an amount similar to what is being injected into the RBS, Lloyds and Barclays. At stake in the total annual funding cut, if Prof. Buiter is correct, are the jobs of roughly 2 million UK workers, or 6-7% of the UK employed workforce. The perverse aspect is, that it appears more "economic" in the accounting of some policy analysts to sack workers who pay 20 or 22% income tax, than it is to raise taxes. But most probably, future policy will include a mix of budget cuts and additional tax imposts.

What has all this to do with Keynesianism? Not very much (beyond a new appreciation of the benefits of state intervention in the financial system), because of the real financial and temporal limits of deficit financing in a globalized economy. But anyway Keynes would probably turn in his grave, if he knew what people were calling "Keynesian economics" these days.

A new era of austerity and "structural adjustments" is opening up; the "fat years" are over and the "lean years" are beginning.

Jurriaan

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Received on Thu Apr 23 17:05:32 2009