Summers, Osborne, and Zakaria on Austerity: Fact Check in One Chart
Fareed Zakaria on Sunday presented an interview with British Chancellor of the Exchequer George Osborne on his CNN talk show GPS. (CNN did not post the video, but you can read the transcript here.) In the course of the interview, Zakaria brought up Larry Summers’s recent criticism of Britain’s austerity policy. The resulting exchange immediately set off my fact-check alert. Here is the relevant bit in full:
ZAKARIA: Let me ask you, to begin with, you’ve been touting Britain’s growth. You’ve written an op-ed in the Wall Street Journal. But, of course, there are a lot of people who say Britain’s recovery has been very weak, the weakest in the G7 other than Italy.
And there is a specific charge made which is that it was your austerity program, especially the spending cuts that was responsible for this very weak recovery.
Let me read to you something Larry Summers said on British television. He said Britain’s economic policies, meaning yours, “Are a powerful empirical test of the efficacy of determined, resolute austerity and the results so far have not been encouraging to advocates of that strategy. They are in line with predictions that this austerity would lead to reductions in demand, reductions in GDP,” et cetera.
What’s your response?
GEORGE OSBORNE, CHANCELLOR OF THE EXCHEQUER AND SECOND LORD OF THE TREASURY OF THE UNITED KINGDOM: Well, I totally reject his analysis. If you look at the situation the U.K. found itself in three-and-a-half years ago, we had had one of the deepest recessions of any of the major economies of the world.
Our GDP had shrunk by over 7 percent of GDP. We had the largest banking crisis of any financial center, the biggest bank bailout. And we exited with a very high budget deficit, an 11 percent budget deficit. Really only the United States had a similar sized deficit and, of course, the U.S. has a reserve currency.
That was the situation we were confronting and we set out a deliberate plan to bring that deficit down, reduce the structural deficit to sort out some of the structural problems in our financial system and to rebalance the British economy.
And I think three-and-a-half years on, the British economy is currently growing faster than pretty much any other Western economy, jobs are being created at a rapid rate each month and you can see a rebalancing happening.
ZAKARIA: One of the points Summers makes though is that the, “path to deficit reduction ultimately lies in stronger growth.” You pointed out that Britain and the United States had roughly comparable budget deficits when the — sooner after the crisis.
The U.S. budget deficit has gone down dramatically, more so than Britain, and the reason, I think Summers would argue, is that we’ve grown faster. And the reason we’ve grown faster is we didn’t have as much spending cuts and as much austerity.
OSBORNE: The thing to focus here is on the structural deficit and there’s been a sharper fall in the structural deficit in the U.K. than any of the other G7 nations.
Is Zakaria, channeling Summers, correct to say that “the reason [the U.S. has] grown faster is we didn’t have as much as spending cuts and as much austerity”? Is Osborne right to say there’s been a sharper fall in the structural deficit in the U.K. than any of the other G7 nations?
Sorry, we are in pants-on-fire territory here. Take a look at this chart that shows the evolution of the primary structural balance in the United States and the U.K.
The primary structural balance (the OECD calls it the “underlying” primary balance), which corrects the budget deficit or surplus for both the state of the business cycle and interest on past debts, is generally accepted as the best measure of fiscal austerity and fiscal consolidation. Two things stand out in the chart.
First, the trajectories of fiscal policy in the two countries are remarkably similar. Both engaged briefly in fiscal stimulus in the immediate aftermath of the global crisis, and both since then have sharply closed their structural budget gaps.
Second, if we look very closely, we see that it is the United States, not the U.K., that has imposed the harsher austerity measures. Between 2009 and 2013, the total movement toward surplus of the primary structural balance has been 4.6 percentage points in the United States and just 3.9 percent in the U.K..
Yes, the United States has grown faster. From 2009 to 2013, the arithmetic average of annual growth rates has been +1.2 percent for the United States and -0.2 percent for the U.K. (For 2013 alone, the projected rates are 1.7 percent for the United States and 1.4 percent for the U.K.)
Note that these figures do not prove that austerity is bad for growth. They leave us free to agree with Osborne that austerity is good for the economy. If so, then it could be that greater austerity is just what has propelled the United States to greater growth. On the other hand, Summers could be right that austerity is bad for the economy. If so, then something else is powering U.S. growth and holding the U.K back.