How austerity killed growth | alittleecon

The OBR published a short note last week showing the impact on growth from the fiscal decisions taken by the Coalition Government. This is not a revelation. The OBR has said before that austerity would have and has had a negative impact on growth, but the chart it produced with this note is quite striking.

It shows that following the crash, Labour’s discretionary fiscal policy (that’s active changes to government spending and taxation) had a positive impact on growth of around 0.3% in 2008/9 and 2009/10. Labour enacted a fiscal stimulus, but not a very big one.

It’s what this chart shows about the period after the 2010 election though that’s most interesting. After assuming power in 2010, the Coalition embarked on it’s policy of austerity. When it was formed, the OBR actually thought austerity in the first year would have a bigger negative impact than it in fact did, but it still provided a drag on growth of about 1% in 2010/11. 2011/12 was actually the year when austerity really started to kick in. When the OBR made it’s first forecasts though, it thought austerity would have a negative impact on growth of around 0.6%. In actual fact though, it was more like 1%.

Source: OBR shows how austerity killed growth | alittleecon

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5 thoughts on “How austerity killed growth | alittleecon

  1. Joan Edington

    I’m never one to hide my ignorance so I have to admit that I don’t totally understand this graph. Maytbe someone better at statistics can explain. I can see by the groups how the explanation makes sense. However, I don’t understand what the 3 colour blocks are for. Why is June 2010 relevant to the block for 2014-2015, for example?

    1. alittleecon

      Each block represent a forecast or an actual result published by the Office for Budget Responsibility. So in June 2010, they made a forecast about how much austerity would impact on growth. The other 2 blocks show how accurate the original forecast was. So in 2010/11, the OBR overestimated how much of an impact austerity would have, but the underestimated its impact in 2011/12.

    2. Daniel

      The different coloured bars represent different “predictions” of change in GDP (growth).

      The yellow bars were the initial prediction, red bars are revised figures. Notice that the yellow bars shows -1.3% in 10-11, but this improves to -0.6% in 11-12, meaning they assumed the worst effects of austerity would be over by then.

      The red bars (revised figures) show a different story though. In 10-11, the effect of austerity wasn’t as bad (still disastrous), showing -1.0% decline in GDP, however, the effects were longer lasting than expected, growth continued to shrink at -1.1% in 11-12. In 2012, Osbourne scaled back austerity, so the growth figures looked better for 12-13 and 13-14.

      Compare also to 08-09 and 09-10. Labour were spending rather than cutting, and you can see that growth actually was positive (0.2% and 0.3% respectively), but GO choked that off with his austerity policy in 2010.

      I hope that helps!

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