There was some debate a couple of weeks ago when Allister Heath cited CEBR research which suggested that the US had in fact done more fiscal consolidation than the UK. Ben Chu (who later did an updated post vindicating Allister’s numbers as correct, with caveats) at first claimed this was a “zombie idea”.
This is an important question. As I documented in a previous blog post, the shadow Chancellor Ed Balls has repeatedly claimed that the US and the UK took clear and distinct paths: the US undertaking a stimulus policy whilst the UK undertook premature contraction. Balls’ analysis implies that the poor GDP growth that the UK has seen relative to the US (up until recently, at least) is because of differing fiscal policies. Yet if the fiscal policies of the two countries weren’t quite so different, or the US experienced an even tighter contraction, then this analysis doesn’t make any sense.
Thankfully, the OECD publish their data all online here, allowing us to delve deeper into this question.
The first question is: how do you measure fiscal consolidation? The best way to think about it is to look at what has happened to the structural deficit over time. This of course is dependent on what the forecasters estimate “the output gap” of the economy, and how much of the borrowing will evaporate as the economy recovers. This can be revised of course, often retrospectively. But the OECD does provide comparator figures for the US and the UK on this measure.
The structural deficit
The chart below shows the path of the general government structural deficit (according to the OECD) between 2009 and 2012. This appears to show that both countries had high structural deficits in 2009 (9.8% of GDP for the UK vs. 10.4% for the US) which has since been brought down somewhat – as such, neither country has engaged in a “stimulus”, which I define here as a deliberate further expansion of the structural deficit, since 2009. By 2012 the structural balance had fallen to 5.5% of GDP for the UK (a 4.3 percentage point decline from 2009), whilst in the US the balance was 7.4% (a 3 percentage point decline). Thus between 2009 and 2012, the figures seem to suggest the UK saw more significant fiscal consolidation than the US.
This is also true if we just look at the period since the Coalition government have been in power here (2010 to 2012). Restricted to that period, the UK structural deficit has fallen by 3.4 percentage points of GDP whilst the US structural deficit has fallen by 2.4 percentage points. On the face of it, the UK has seen more “austerity”, that is a closure in its structural deficit, than the US during this period.
What is clear, however, is that even looking at this measure, the US looks to see much more significant consolidation under the sequester during this next few years. In fact, the OECD believes that by the end of this calendar year the US would have seen a contraction of 6.2 percentage points of GDP, compared to 3.9 percentage points for the UK.
But what about one offs…
On the face of it then, the UK consolidation between 2009 and 2012 was harder than in the US, and in 2013 and the 2014 the US is going to cut harder. Or was it?
The OECD’s underlying balances series strips out any one-off fiscal factors to try to better gauge the underlying health of the public finances. For the UK, this is quite significant, because as the OECD states: “Revenues due to quantitative easing that have accumulated in a special fund for several years, and that will be transferred to the treasury in well-identified instalments over the projection period, are treated as fiscal one-offs”. Thus stripping out this and other factors, the underlying picture looks a bit different.
The chart above shows the figures under this measure. This shows a rather different story. Now the UK underlying deficit fell from 9.1% of GDP in 2009 to 7.8% of GDP in 2012 (a fall of 1.3 percentage points of GDP), whilst the US deficit fell from 9.4% of GDP in 2009 to 7.2% of GDP in 2012 (a fall of 2.2 percentage points of GDP). Within these years, the UK consolidation was still frontloaded, but overall on this underlying basis it’s clear the US has consolidated more over this period, and will consolidate by significantly more over the next two years. This viewpoint is robust to looking at an underling primary balance which also excludes interest payments.