A riposte to Ed's anti-Corbynomics presentation - compulsory Y13

ECONOMICS

 

MARIANA MAZZUCATO

Mariana Mazzucato, Professor of the Economics of Innovation at the Science Policy Research Unit of the University of Sussex, is the author of The Entrepreneurial State: Debunking Public vs. Private Sector Myths.

SEP 29, 2015

Jeremy Corbyn’s Necessary Agenda

BRIGHTON – Seven economists (including Joseph Stiglitz, Thomas Piketty, and me) have agreed to become economic advisers to Jeremy Corbyn, the new leader of the British Labour Party. I hope we will have a shared goal to help Labour shape an economic policy that is investment-led, inclusive, and sustainable. We will bring different ideas to the table, but these are my thoughts on the kind of progressive agenda the United Kingdom – and the rest of the world – now needs.

When the Labour Party lost the election last May, it received considerable criticism – even from its own frontbenchers – for failing to embrace the business community as “wealth creators.” But while businesses clearly create wealth, so do workers, public institutions, and civil-society organizations, which, through dynamic partnerships, drive long-term growth and productivity. Indeed, a progressive economic agenda must begin with the recognition that wealth creation is a collective process and that market outcomes are the product of how these various “wealth creators” interact.

We must drop the false dichotomy of governments versus markets and begin to think more clearly about the market outcomes we want. There is plenty to learn from public investments that were mission-oriented, instead of focused on “facilitating” or “incentivizing” business. Policy should actively shape and create markets, not just fix them when they go wrong.

Indeed, policies traditionally considered “business friendly,” such as tax credits and lower tax rates, can be bad for business in the long run if they limit governments’ future ability to invest in areas that increase innovation-led growth. Likewise, it is time to move on from the debate over austerity to a new conversation about how to build smart, mutually beneficial public-private partnerships to fuel decades of growth.

For starters, we must invest in education, human capital, technology, and research. Massive technological and organizational advances have raised productivity in many sectors. Many (if not most) of these breakthroughs have their origins in publicly funded research. Ensuring future advances will require direct policy interventions and investments in innovation across the entire innovation chain: basic research, applied research, and early-stage company financing.

Moreover, we need more patient, long-term finance. Most existing finance is too speculative and too focused on short-term outcomes. Exit-driven venture capital might be appropriate for gadgets; but technological revolutions have historically required patient, committed public financing. In some countries, like Germany and China, public banks take on this role. In others, the job is done by strategic public agencies.

This also means de-financializing the real economy, which has been overly focused on short-term concerns, so that profits are reinvested into production and research and development, rather than hoarded or spent on share buybacks. Over the last decade, Fortune 500 companies in areas like information technology, pharmaceuticals, and energy have spent more than $3 trillion buying back shares in order to boost stock prices, stock options, and executive pay. Meanwhile, in the United States and Europe alone, companies have hoarded nearly $4 trillion. Companies should be rewarded for reinvesting their profits in production, innovation, and human-capital formation.

Next, we must increase wages and standards of living. Until the 1980s, productivity increases were accompanied by wage increases and rising living standards. This link was broken by a drop in labor’s negotiating power and companies’ increased financial orientation. Unions are key to effective corporate governance and hence should be more involved in innovation policy, pressing for investments in education and training – the long-run drivers of wages.

Public institutions must also be strengthened. Bold policy choices require public agencies and institutions that are able to take risks and learn from doing so. Outsourcing government services that lie within the government’s own competency hinders this process as it reduces the public sector’s “absorptive capacity.” Creating a network of well-funded, decentralized agencies and institutions that work in partnership with business would make government both more effective and more strategically focused.

The tax system must be made more progressive as well, with tax credits for businesses designed to encourage inclusive outcomes. We must end the current practice of blindly lowering taxes, creating loopholes that allow legal tax avoidance, and offering tax credits that have little effect on investment and job creation.

When the public sector takes key risks along the innovation chain – such as providing guaranteed loans to companies like Tesla – we should think more creatively about the kinds of contracts that enable the public to share not only the risks, but also some of the rewards.

We must also shape a new narrative on debt. Rather than focus on budget deficits, we should concentrate on the denominator of debt-to-GDP ratios. As long as public investment increases long-term productivity, the ratio will remain in check. In the OECD, many of the countries with the highest debt-to-GDP ratios – including Italy, Portugal, and Spain – ran relatively modest deficits, but failed to invest effectively in education, research, training, or well-designed welfare programs that facilitate economic adjustment.

Fiscal and monetary policy will be important, but only if coupled with the creation of opportunities in the real economy. Money creation, through quantitative easing, will not fuel the real economy if the new money ends up in banks that do not lend. And when businesses do not see opportunities, interest rates stop affecting investment.

Finally, we must not shy away from guiding the direction of development toward a green economy. Beyond “shovel-ready” infrastructure projects, fiscal stimulus should support transformational projects, such as those that led to advances in information and communication technology, biotech, and nanotech that were “chosen” by public policy working alongside businesses. Green development can be about much more than renewable energy; it can become a new direction for the entire economy.

The British Labour Party, along with other progressive parties around the world, has a responsibility to change the discussion on economic policy. By doing so, it has the opportunity to shape the future.

https://www.project-syndicate.org/commentary/corbyn-labour-progressive-economic-agenda-by-mariana-mazzucato-2015-09

© 1995-2015 Project Syndicate

Read more at https://www.project-syndicate.org/commentary/corbyn-labour-progressive-economic-agenda-by-mariana-mazzucato-2015-09#7iOmjBX0BsjwlTly.99

Economics Today Publication - September 2015

New for this year, we have purchased a quarterly subscription to Economics Today, a magazine similar to Economic Review in that it is written specifically for A level students.

I have stripped out the most interesting articles and placed them as individual PDFs on the schools resource drive. They are all very current, so provide excellent context for both AS and A2 students. Articles include:

• Supply and Demand in the UK Housing Market
• Are we in the middle of a currency war
• Good v Bad Deflation
• The milk market in the UK
• Government intervention in mergers
• Economics and Climate Change
• Measuring Consumer Surplus

All are on the school's resource drive under 'Economics Resources / Economics Today September 15' - so you can access them whenever you logon in school or through VMWare or Securelink

AD & AS resources for Y12

http://beta.tutor2u.net/economics/series/aggregate-supply




http://beta.tutor2u.net/economics/topics/aggregate-demand




Videos:
















Too noisy? A calmer view:

Aggregate Supply Y12

Please use the notes below to embed your knowledge of aggregate supply:


http://beta.tutor2u.net/economics/reference/aggregate-supply


Aggregate supply measures the volume of goods and services produced each year. AS represents the ability of an economy to deliver goods and services to meet demand.


Short run aggregate supply shows total planned output when prices can change but the prices and productivity of factor inputs e.g. wage rates and the state of technology are held constant.


Long run aggregate supply shows total planned output when both prices and average wage rates can change – it is a measure of a country’s potential output and the concept is linked to the production possibility frontier

• In the long run, the LRAS curve is assumed to be vertical (i.e. it does not change when the general price level changes)
• In the short run, the SRAS curve is assumed to be upward sloping (i.e. it is responsive to a change in aggregate demand reflected in a change in the general price level)

Short Run Aggregate Supply Curve
A change in the price level brought about by a shift in AD results in a movement along the short run AS curve. If AD rises, we see an expansion of SRAS; if AD falls we see a contraction of SRAS.

Short run aggregate supply curve

Shifts in Short Run Aggregate Supply (SRAS)
Shifts in the position of the short run aggregate supply curve in the price level / output space are caused by changes in the conditions of supply for different sectors of the economy:

• Employment costs e.g. wages, employment taxes. Unit labour costs are also affected by the level of labour productivity
• Costs of other inputs e.g. commodity prices, raw materials. The exchange rate can affect the prices of key imported products
• Impact of government e.g. environmental taxes such as carbon duties & business regulations which affect the costs of production 

Shifts in the aggregate supply curve

The main cause of a shift in the aggregate supply curve is a change in business costs – for example:


1.Changes in unit labour costs - i.e. labour costs per unit of output


2.Changes in other production costs: For example rental costs for retailers, the price of building materials for the construction industry, a change in the price of hops used in beer making or the cost of fertilisers used in farming.


3.Commodity prices Changes to raw material costs and other components e.g. the prices of oil, natural gas, electricity copper, rubber, iron ore, aluminium and other inputs will affect a firm’s costs


4.Exchange rates: Costs might be affected by a change in the exchange rate which causes fluctuations in the prices of imported products. A fall (depreciation) in the exchange rate increases the costs of importing raw materials and component supplies from overseas


5.Government taxation and subsidies:

1. An increase in taxes to meet environmental objectives (known as green taxes) will cause higher costs and an inward shift in the SRAS curve – for example a higher price for carbon emissions
2. Lower duty on petrol and diesel would lower costs and cause an outward shift in SRAS

6.The price of imports:

1. Cheaper imports from a lower-cost country has the effect of shifting out SRAS
2. A reduction in an import tariff on imports or an increase in the size of an import quota will also boost the supply available at each price level causing an outward shift of SRAS

Short run shocks to production: Temporary non-economic factors affect SRAS in different countries, for example a hurricane, a tsunami or the effects of drought, flooding or political crisis.


Key revision point: The main driver of SRAS for the economy is the level of production costs some of which are influenced by government policy, others by world prices. Remember that the exchange rate is important for the UK because a large percentage of our components / raw materials / energy are imported.

Causes of a fall in aggregate supply

Aggregate Demand for Y12

Please use the following resources to embed AD material:


http://beta.tutor2u.net/economics/reference/aggregate-demand-ad


Aggregate means ‘total’ and in this case we use the term to measure how much is being spent by all consumers, businesses, the government and people and firms overseas.
Aggregate demand (AD) = total spending on goods and services


AD = C + I + G + (X-M)


C: Consumers' expenditure on goods and services: Also known as consumption, this includes demand for durables e.g. audio-visual equipment and vehicles & non-durable goods such as food and drinks which are “consumed” and must be re-purchased.


I: Capital Investment – This is spending on capital goods such as plant and equipment and new buildings to produce more consumer goods in the future. Investment includes spending on working capital such as stocks of finished and semi-finished goods.


Capital investment spending in the UK accounts for between 15-20% of GDP in any given year. Of this investment, 75% comes from private sector businesses such as Tesco, British Airways and British Petroleum and the remainder is spent by the government – for example building new schools or in improving rail or road networks. Investment has important effects on the supply-side as well as being an important component of AD.


A small part of investment spending is the change in the value of stocks. Producers may find either than demand is running higher than output (i.e. stocks will fall) or that demand is weaker than expected and below current output (in which case the value of stocks will rise.)


G: Government Spending – This is spending on state-provided goods and services including public goods and merit goods. Decisions on how much the government will spend each year are affected by developments in the economy and the political priorities of the government.
Government spending on goods and services is around 18-20% of GDP but this tends to understate the true size of the government sector in the economy. Firstly some spending is on investment and a sizeable amount goes on welfare state payments.


Transfer payments in the form of benefits (e.g. state pensions and the job-seekers allowance) are not included in current government spending because they are a transfer from one group (i.e. people paying income taxes) to another (i.e. pensioners drawing their state pension having retired, or families on low incomes).


X: Exports of goods and services - Exports sold overseas are an inflow of demand (an injection) into our circular flow of income and spending adding to aggregate demand.
M: Imports of goods and services. Imports are a withdrawal of demand (a leakage) from the circular flow of income and spending.


Net exports measure the value of exports minus the value of imports. When net exports are positive, there is a trade surplus (adding to AD); when net exports are negative, there is a trade deficit (reducing AD). The UK has been running a large trade deficit for several years now.

Components of Aggregate Demand - £bn, 2006 prices
	Consumer Spending	Government Consumption	Fixed Investment	Exports	Imports
2003	859.3	297.9	221.9	362.1	409.6
2004	887.2	309.3	235.7	379.7	438.0
2005	912.6	316.3	244.4	414.1	468.4
2006	928.8	323.3	258.1	463.8	515.3
2007	954.7	325.7	277.3	454.3	507.3
2008	946.0	332.4	258.3	459.1	498.6
2009	912.2	334.9	215.1	419.3	445.1
2010	921.0	336.5	221.2	447.3	480.1
2011	916.4	336.4	215.9	467.2	481.5
2012	927.4	345.7	217.0	471.3	494.9

Components of Aggregate Demand

Shocks to aggregate demand

• Many unexpected events cause changes in the level of demand, output and employment
• These events are called “shocks”. Some of the causes of AD shocks are as follows:

1. A large rise or fall in the exchange rate – affecting export demand and second-round effects on output, employment, incomes and profits of businesses linked to export industries.
2. A recession in main trading partners affecting demand for exports of goods and services.
3. A slump in the housing market or a big change in share prices
4. An event such as the credit crunch (global financial crisis) – involving a fall in the amount of credit available for borrowing by households and businesses.
5. An unexpected cut or an unexpected rise in interest rates or change in government taxation and spending – for example deep cuts in government spending as part of fiscal austerity

These shocks will bring about a shift in the aggregate demand curve


The Aggregate Demand Curve


The AD curve shows the relationship between the general price level and real GDP

The AD curve

Aggregate Demand and the Price Level
There are several explanations for an inverse relationship between AD and the price level in an economy:
1.Falling real incomes: As the price level rises, the real value of people’s incomes fall and consumers are less able to buy the items they want or need. If over the course of a year all prices rose by 10 per cent whilst your money income remained the same, your real income would have fallen by 10%
2.The balance of trade: A persistent rise in the price of level of Country X could make foreign-produced goods and services cheaper in price terms, causing a fall in exports and a rise in imports. This will lead to a reduction in net trade and a contraction in AD
3.Interest rate effect: if the price level rises, this causes inflation and an increase in the demand for money and a possible rise in interest rates with a deflationary effect on the economy. This assumes that the central bank (in our case the Bank of England) is setting interest rates in order to meet a specified inflation target.
Shifts in the AD Curve

• A change in the factors affecting any one or more components of aggregate demand i.e. households (C), firms (I), the government (G) or overseas consumers and business (X) changes planned spending and results in a shift in the AD curve. 

Shifts in the AD curve

Factors causing a shift in aggregate demand

Changes in Expectations Current spending is affected by anticipated income and inflation	When confidence falls, we see an increase in saving and businesses postpone investment projects because of worries over weak demand and lower expected profits.
Changes in Monetary Policy – i.e. a change in interest rates	If interest rates fall – this lowers the cost of borrowing and the incentive to save, encouraging consumption & investment There are time lags between changes in interest rates and AD
Changes in Fiscal Policy Fiscal Policy refers to changes in government spending, taxation and borrowing	Income tax affects disposable income e.g. lower income tax raises disposable income and should boost consumption. A budget deficit is a net injection of aggregate demand
Economic events in the world economy International factors such as the exchange rate and foreign income	A depreciation in a currency makes imports dearer and exports cheaper - the net result should be that UK AD rises An increase in overseas incomes raises demand for exports. In contrast a recession in a major export market will lead to a fall in exports and an inward shift of aggregate demand.
Changes in household wealth	Changing share and property prices affect the level of wealth Declining asset prices can hit confidence / a fall in expectations
Changes in the supply of credit	The availability of credit is vital for the smooth functioning of most modern economies Many banks and other lenders are now more reluctant to lend Interest rates on different loans have become more expensive

Exports - an injection into the circular flow and a component of AD

More hints about the global economy:

Economy

Caterpillar to cut 10,000 jobs amid China slowdown and falling revenues

• By Kedar Grandhi
  September 25, 2015 06:12 BST
• 116   

Caterpillar's restructuring to save it $1.5bn annuallyReuters

Caterpillar, the world's biggest construction and mining equipment maker, plans to cut 10,000 jobs through 2018, of which up to 5,000 could take place by the end of 2016. The cuts, which follow expectations of a third straight year of declining revenues, aim to consolidate its manufacturing facilities, creating $1.5bn in annual savings.

The restructuring, at over 20 plants worldwide across its energy and transportation, construction and resources businesses, would entail a pretax cost of about $2bn.

The Peoria, Illinois-based company, whose workforce stood at 114,233 employees as of 31 December, 2014 according to Thomson Reuters data, has already laid off 31,000 employees since mid-2012.

The company expects revenue to fall in 2015 for the third straight year to $48bn, below the average analysts' estimate of $48.82bn. "2016 would mark the first time in Caterpillar's 90-year history that sales and revenues have decreased four years in a row," according to a company statement.

The 2015 forecast is a 27% drop from 2012. Caterpillar shares which have fallen 23% this year were down 6.3% at $65.81 in afternoon trading on Thursday (24 September) when its market value which stood at nearly $60bn at the end of 2012 was down to about $39bn.

Due to slowing economic growth worldwide especially in China and an over-supply of raw materials used in construction such as crude oil, copper, coal and iron ore, the company's price realisation has fallen to six-year lows. Mining and energy companies have reduced their budgets and expansion plans leading to a decline in demand for construction equipment.

Peers that have indicated similar concerns include Caterpillar's UK-based rival JCB which recently said it would cut jobs due to a slowdown in Russia, China, and Brazil; mining equipment maker Joy Global which issued a profit warning earlier this month as it struggled to adapt to slowing demand for its services; and the world's largest maker of farm equipment Deere & Co, which announced layoffs of more than 900 plant employees in January due to a decline in demand for agricultural machinery.

More about global job cuts

• Hewlett-Packard to cut more than 25,000 jobs
• Deutsche Bank to axe 23,000 jobs in John Cryan's reorganisation efforts
• Morrisons shop closures and job cuts: All we know so far about David Pott's turnaround plans
• Boeing 'to cut several hundred jobs' in satellite division
• BHP Billiton axes 380 mining jobs in South Australia
• British Gas owner Centrica slashes 6,000 jobs in cost cutting scheme

Y12 AS resource

Tutor2u resource on AS

This will appeal to the anti-Keynesians

As I have stated, this is a key area of conflict in economics; you are taught all about Keynesian policy ideas, you learn all the models - and then we teach you it could be all wrong. Why? Partly because you have to make up your own minds where you stand on all this, but also because the disagreement is the richest area for you to mine in your essays. Clearly, if there was a simple solution, it would have been enacted, we would all be wealthy, and I certainly wouldn't have anything to teach. Think about the debate in this article as on-going, and undecided:

Keynesians are wrong: Cutting public spending can boost economic growth

The key aim of George Osborne’s economic policy has been to eliminate the financial deficit of the public sector.  The main way of trying to achieve has been to squeeze public spending.  The orthodox economic textbooks maintain that this withdraws demand from the economy, and so leads to the growth rate being slower than it would otherwise be.


But can contractionary fiscal policy of this kind actually expand the economy?  At first sight, it seems something of a contradiction, the concept that spending less might cause higher growth.  An oxymoron, one might say – where I am using the word in its regular sense and not referring to those Greeks who voted ‘no’ in the referendum.   The very idea provokes howls of derision and outrage, from leading Keynesians such as Stiglitz and Krugman downwards.


Yet we have been here before.  In early 1981, the UK economy had moved into a deep recession, comparable in size to that which we experienced during the financial crisis.  In the budget of March of that year, the then Chancellor, Geoffrey Howe, cut the financial deficit by 1.5 per cent of GDP, or some £20 billion in today’s prices.  This prompted no fewer than 364 university economists to write to the Times in protest, explaining that the policy was completely misguided and would only serve to prolong the recession.  In fact, the economy began to recover during 1981, and posted a healthy growth rate of 2.2 per cent in 1982, followed by a boom rate of 3.9 per cent in 1983.


One swallow does not make a summer.  Is there any other evidence?  Tim Congdon, in a recent article in the journal Economic Affairs, claims that since the 1980s, ‘expansionary fiscal contractions’ have been the norm rather than the exception both in the UK and the US.  Keynesian support for fiscal activism is, he argues, unsupported by a large body of recent evidence.  To cite just one example, Congdon points to the substantial fiscal tightening under the Conservatives from 1994 and initially continued by Gordon Brown until 2000.  Over this period, the UK economy grew rapidly.
There are good theoretical reasons for thinking that cutting the government deficit could stimulate rather than contract the economy. 


The classic paper was written by Robert Barro of Harvard as long ago as 1974.  Its rather mysterious title, ‘Are government bonds net wealth?’, has not prevented it from becoming one of the most cited papers in the whole of economics.  Barro, who was subsequently awarded the Nobel Prize for work such as this in macroeconomics, essentially argued that a nation cannot make itself better off by increasing its public debt. More recently, the work of the Italian economist Alberto Alesina, now also based at Harvard, has been influential in policy making circles in the European Commission and European Central Bank.


The simple view that more government spending boosts the economy appears to make common sense.   The opposing views are more subtle and complex.  But it is the latter which at present have the upper hand.


Paul Ormerod
As published in City AM on Wednesday 12th August 2015


PS If anyone wants more extreme views of the absurdity of some Keynesian economists, I have plenty of links.

Short video on impact of China slowdown

This is a murky area, to say the least, as anyone who bothers to read up on this area - or indeed, reads the Soc Gen research notes I put on the noticeboard in the corridor. It is obvious that parts of the Chinese economy are slowing dramatically, but meanwhile, other areas appear to be thriving. However, also of interest is which other countries are likely to feel the negative effects of the slowdown:

Austerity, true or false?

I know that is not a proper question, but it is valid to question the "real" level of austerity this government claims to be aiming for (and the opposition decry as being fatal for the poor and our economy). As budding economists a certain scepticism is essential:

Has austerity really been cover for a fiscal stimulus in the UK and Portugal?

Posted on September 24, 2015 by notayesmanseconomics

Regular readers will be aware of my financial lexicon for these times which coves the true meaning of words regularly used in the mainstream media to cover finance issues. Next to temporary in length of definition comes austerity as it means many different things to different people. The conventional view is that it involves a reduction in fiscal deficits involving lower public expenditure and higher taxes. However in the Euro area and in Greece especially it has also lead to higher fiscal deficits compared to economic output or GDP (Gross Domestic Product) at times due to the fact that it’s consequences collapsed output even faster and led to higher expenditure on social issues.


This week has seen new numbers from the UK and Portugal which have raised yet another version of austerity. This is where we get open mouth operations from government claiming it but if we step back and look at the overall picture it also looks awfully like an ongoing fiscal stimulus.


The UK
If you recall that the UK GDP numbers have had a good couple of years plus then you would not be expecting this.

Public sector net borrowing excluding public sector banks increased by £1.4 billion to £12.1 billion (0.6% of Gross Domestic Product) in August 2015 compared with August 2014.

Now we know that single months figures can be erratic as for example the July figures saw a surplus so let is look at the fiscal year so far.

Public sector net borrowing excluding public sector banks decreased by £4.4 billion to £38.4 billion (1.9% of Gross Domestic Product) in the current financial year-to-date (April 2015 to August 2015) compared with the same period in 2014.

Again if we consider the economic recovery this is disappointing on two counts. The first is the slow pace of reduction and the second is that in only five months the UK still needs to borrow some £38.4 billion. If we start with the slow pace of reduction we see that revenue growth has been strong (3.7%) but that public expenditure has risen too by 1.2%. So we have two issues for austerity here as firstly it plainly does not mean an outright fall in spending! Secondly as we are continually told by official numbers (CPI) that there is no inflation this is a real terms increase which looks more like a fiscal stimulus than austerity does it not? Also something is about to push the figures higher.

However for State Pensions there is a “triple guarantee” that mean that they are uprated by the highest of the CPI, increases in earnings or 2.5%, which is the rise for the financial year ending 2016

In fact we are behind the official target for borrowing. OBR is the Office for Budget Responsibility.

The OBR forecast for the financial year ending 2016 (April 2015 to March 2016) is £69.5 billion which is £20.6 billion below the outturn in financial year ending 2015.

This begs the question of how long it will take to eliminate the deficit if reductions are so slow when if I may put it “the sun is shining!”. If we look back we see this for the UK fiscal deficit as a percentage of GDP.

10.2% in 2009/10 then 8.6% then 7% then 7.2% then 5.8% then 5%.

You may note the rise in 2012/13 which has led to the suggestion that the reins were loosened back then or what in the past would have been called a fiscal stimulus took place. Also there has been quite a fiscal stimulus compared to this forecast by the OBR back in November 2010.

PSNB is expected to fall from 11.1 per cent of GDP in 2009-10 to 1.0 per cent of GDP in 2015–16.

Care is needed as economic growth underperformed for a time but if we look at the past couple of years we have gained little ground if we consider the favourable economic environment. Fiscal Stimulus 2.0? That is very contrary to the mainstream media presentation.


The impact on the National Debt


This is what it was supposed to do via the OBR back in November 2010.

Public sector net debt (PSND) is forecast to peak at 69.7 per cent of GDP in 2013–14, then decline to 67.2 per cent of GDP in 2015-16,

And this is what it is now.

Public sector net debt excluding public sector banks at the end of August 2015 was £1,505.5 billion (80.6% of Gross Domestic Product); an increase of £68.9 billion compared with August 2014.

As we observe up being the new down yet again I would also like to add the numbers below so that we can have a like for like comparison with Portugal.

General government gross debt at the end of August 2015 was £1,651.7 billion (88.4% of Gross Domestic Product) and General Government Net Borrowing in the financial year ending 2015 (April 2014 to March 2015) was £93.5 billion (5.2% of Gross Domestic Product).

I like seeing that number at the front of the ONS Statistical Bulletin partly because I suggested it.


Portugal


This is a nation that has been through the mill of Euro area austerity and the falls in economic output and GDP associated with it. More recently the Portuguese economy has been able to edge forwards and see a little growth. So we are now seeing austerity? Well decide for yourself. From Portugal Statistics.

The net borrowing of the General Government was 12 466 million Euros in 2014, a more negative result than the observed in the previous year……… corresponding to 7.2% of GDP.

Now after all that claimed austerity a debt to GDP ratio of 7.2% poses the same fiscal stimulus question. It was also quite a rise on the previously published 4.5%! If they hoped that nobody would notice they failed and it was due to an issue I have pointed out on here before which is the attempt to hide the costs of yet another bank bailout. Novo Banco in this case.

The behaviour of capital expenditure is explained mostly by the recording of the capitalization of Novo Banco as capital transfer by the amount of 4.9 billion euro.

Also there were other problems with the banking industry.

Capital expenditure also increased as a result of the recording of the capital transfers related to the financing of STCP and Carris, the writeoff of nonperforming loans of BPN Crédito owned by Parvalorem S.A..

This is the opposite of a gift that keeps on giving and shows the problem of kicking the bank problem can into the future. All this time and the costs are only now catching up in the official records.


What we find though is that the deficits persist and this time for a different reason to the UK which took its bank pain up front oh and rather sneakily did its fiscal numbers excluding banks. Sir Humphrey Appleby played a blinder on the mainstream media as I recall for example it came as a surprise to Stephanie Flanders of the BBC when she finally spotted it!
However Portugal is less into a recovery phase than the UK but has had a persistent fiscal deficit which returns us to the austerity versus stimulus debate again. We were told that the deficit to GDP ratio had gone from 7.4% in 2011 to 5.6% in 2012 then 4.8% and then 4.5%. So progress is slow but the replacement of 4.5% by 7.2% puts a different picture on things. Is austerity just a lower fiscal stimulus?


For Portugal there are two main problems here. The first is the size of its national debt is now 130.2% of GDP, far higher than the 120% previously used as a crisis level by the Euro Institutions (ex-troika in the way that Windscale became Sellafield in the UK). The next is not especially the annual burden as with its 6.6 billion Euro QE program for Portuguese government bonds the ECB is taking care of that. No it is a capital issue as we compare the capital burden with Portugal’s long-standing economic growth problem where over time around 1% is about as good as it gets.


Comment


UK Chancellor of the Exchequer George Osborne told us this in the Budget.

therefore in normal economic times governments should run an overall budget surplus, so our country is better prepared for whatever storms lie ahead…..In short we should always fix the roof while the sun is shining.

An interesting admission that we are not in normal times which gave an early clue to Bank of England interest-rate hike but then we got this too.

Thereafter, governments will be required to maintain that surplus in normal times – in other words, when there isn’t a recession or a marked slowdown.

You might like to read the actual numbers for the UK again. Or perhaps it is time for Alice In Wonderland to help us out.

https://notayesmanseconomics.wordpress.com/2015/09/24/has-austerity-really-been-cover-for-a-fiscal-stimulus-in-the-uk-and-portugal/


Read it and weep.