Austerity

Counter-cyclical government spending seems to be common sense to me, it also seems to be common sense that in order for this to work, a government should run a surplus during the good years.

I haven't read much about what happens to the Keynesian prescription if there isn't that buffer of a surplus, particularly not in the Guardian. Are all bets off, or is the stimulus recommendation the same? What happens if the stimulus doesn't return the economy to growth within a sensible amount of time, should spending continue? What if it's likely that the recession is due to various factors such as declining international competitiveness and an aging population - do you keep spending? I imagine the picture becomes a complicated political one, involving balancing short-term and long-term aims. That's not something politicians should be expected to be good at, not when it's all about headlines, winning elections, and all about what an electorate thinks that expects politicians to solve every problem and make everything better.

The current course of action is to reduce the spending slowly enough to keep pain to a minimum, but without losing the confidence of the gilt markets. So we continue to have a large stimulus, but it's coming down because in the long term we want to keep the massive amount of debt we've got to deal with to a minimum. In drawing this process out, economic growth will hopefully pick up and make the whole thing easier. Given the circumstances I think this is hardly the Tories sharpening knives and relishing cuts - and it's worth remembering the cuts are less than Alistair Darling promised at the last election. It's also worth having a bit of perspective, we're spending all this money, yet, for example, we're not at war, we've not had a huge natural disaster, we've not just run out of oil, and we don't know we're not five or ten years from an equally bad economic crisis.

However, a lot of people think that the current recession is caused by austerity, and we need more spending right now to solve things. That spending in the right areas is a multiplier effect, leading to more tax revenues, and that conversely, cuts lead to a negative spiral of reducing tax revenues. I think proponents of these ideas need to demonstrate why they haven't invented an economic perpetual growth machine. If the extra spending is a no-brainer, why not even more so we get an even bigger effect? Why not do it all the time, even when the economy is growing, to achieve even more growth?

The answer to those questions is probably that, as we spend more and more, the positive gains of spending borrowed money tail off and get replaced by a bigger and bigger component of simply consuming tomorrow's wealth today. That will then have to be paid back tomorrow, and once we've spent it, we haven't achieved anything and don't have further growth unless we borrow more, and this can't go on forever. And if that's the case, the sooner we accept it, the less painful it is.

People who want more money spent also seem to ignore the big questions we face, or at least pretend that those questions will be easier to solve if we approach them off the back of a bit of free spending-induced growth. These big questions we must face are, for example, what to do about Britain's decreasing competitiveness, increasing welfare dependency, increasing debt levels (public and private), the under-supply of housing, and the cost of retirement. It's just not as simple as blaming evil Tories and greedy banksters for our predicaments.