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Paul Krugman gets Britain's situation wrong on two levels

    Nile Gardiner has a new column on Telegraph blogs in response to Paul Krugman's New York Times article 'Death of a Fairy Tale'. In the column, Krugman had attacked British austerity by highlighting an economic report which stated that 'Britain is doing worse in the current slump than it did in the 1930s.'

    Krugman seems to have fallen for two common misconceptions:

    1) that Britain has actually engaged much in the way of austerity so far

    2) that the 1930s was, on the whole, a terrible time for Britain

    As readers of this blog will know, public spending has barely fallen in real terms since the Coalition took office. In fact, overall spending (excluding debt interest payments and social security) has fallen by just 0.8% or £4 billion since 2009/10. This after a decade in which public spending increased by 46%. It's certainly true that there have been tax hikes as well - which should not have been front-loaded. But 94% of the cuts to current government spending and 88% of the cuts to welfare spending are still to come.

    It's simply implausible that these small cuts so far are the primary factor behind our slow recovery. Even Ed Balls, when pressed, alters his argument to talk about the confidence effect of the announced spending cuts rather than the direct effect of public spending restraint. The reality is our economy is over-indebted, over-taxed, and over-regulated - and requires widescale economic reform alongside sound public finances to have any chance of sustained growth.

    Given the rhetoric of the 'cuts' debate, however, Krugman could be forgiven for his misinterpretation of the UK's situation today. But his comment about Britain being worse now than in the 1930s implies that the 1930s was a terrible time. This is simply wrong.

    Of course, there were areas of the country and particular industries which fared badly. But on the whole the UK economy prospered following our coming off the Gold Standard and short, sharp spending cuts. Economic growth averaged 4% a year in real terms between 1934 and 1939, stimulated primarily not by rearmament but by the successful tax and economic policies of the National Government. So whilst Krugman's statement is factually correct, in that we did grow faster then than now, this owed more to the success of austerity and an effective cheap money in the 1930s than to a failure of the small-scale austerity measures implemented so far by the Coalition.

    George Trefgarne's excellent recent CPS book sets out the historical lessons we can learn from the 1930s in much more detail: Metroboom.

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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    Comments

    Peter Gambrill - About 2686 days ago

    You miss the point, you seem to be saying that how can austerity be the cause of the demand problem when it has barely started yet, when the point Krugman and others make is that given there is a demand problem (individuals not spending, businesses not investing) government spending, not austerity, is the answer.

    Now you can disagree with that if you want but as you've presented it you are arguing against a case no one has made.

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