The Age of Austerity?

Yesterday, for the first time since 1986, the opening day of an Oval test match did not sell out. This could be down to the pusillanimous performance of the touring Pakistan team in the preceding matches, or maybe the looming crisis facing English cricket. But seen alongside a range of other recent developments, it might be perceived as an indication that we are entering what the boss of Asda this week rather gloomily termed an "Age of austerity".

The debate about how best to approach this daunting prospect continues to rage. Lord Skidelsky and Michael Kennedy, writing in the Financial Times recently, invoked Keynes' argument that “the boom, not the slump, is the right time for austerity at the Treasury”, and concluded that "austerity in the capital budget is the worst possible remedy for a slump".

But, as P-Solve CIO, Glyn Jones, pointed out in this week's Financial News, the snag with this argument is that austerity measures weren't applied during the boom years. Furthermore, are we really looking at meaningful austerity measures anyway? The outgoing Labour administration's final forecast was that the value of all UK gilts in issuance over the next five years would rise by another £567 billion, whereas the new coalition government forecasts this figure will now be "a mere £454 billion. And we are told this is austerity." In fact, he continues, it's unlikely that any government will have the nerve to impose anything resembling real austerity, because of the harmful impact on the electorate. More likely, inflation will come to be seen as the best way to write off colossal debt levels. As Mr Jones concludes, "outright default is unlikely for most countries, but inflation is not. It is simply the easiest way to share the pain of removing excessive debt."

AF