Britain has officially slipped back into a recession. After two consecutive fiscal quarters of negative growth, Britain is now officially in the second dip of a double dip recession. British Prime Minister David Cameron’s Conservative Government was recently touting its austerity measures as quickly leading Britain in the direction of financial recovery, but They are now being forced to explain the unexpected downturn their domestic economy.
Meanwhile, Labour Party leaders in England, and Keynesian economists are declaring victory. Both of those groups opposed austerity, which is when a government reduces spending and increases taxes and interest rates in order to cut its deficit. The rationale behind austerity is that it will improve the government’s fiscal situation, and preempt a debt crisis like what we’re seeing in Greece.
Austerity, as Nobel Prize winning economist Paul Krugman has pointed out, “was just invented out of thin air and a few dubious historical examples to serve the prejudices of the elite.” In a July 2010 Op-Ed Krugman even predicted that austerity measures would fail.
Alex Massie at The Spectator recently argued that Cameron’s austerity measures can’t be blamed for the recession because they have hardly gone into effect yet. However, as Andrew Sullivan pointed out, Massie ignores that British sales tax increased 10.6% and core spending has reduced 2.3% under the Cameron government. This represents a double hit to the economy as both consumer demand and government contributions to the economy are decreased. So while Massie agues that Cameron and George Osborne’s austerity measures have not fully kicked in, he fails to recognize that we now have enough evidence to see that the British austerity package is failing.
The basic argument of Keynesian economics, that governments need to increase spending in times of a depressed economy, appears to have scored a victory. While the situation in the UK is not perfectly analogous to the situation in the US, the numbers coming from across the pond ought to temper conservative voices calling for austerity measures in the US.
Unfortunately, we already know it won’t.