, and the eurozone inflicted a full-blown depression on its southern half. It was this collective error that explains the lost decade that followed in the liberal democracies, and led to corrosive over-reliance on quantitative easing. But the US and Europe are not repeating that mistake today. Only the UK is ramming through such rapid consolidation. 'It is as if we've learned nothing: they're back to the same austerity, using the same models, and the same multipliers, talking about the same imaginary black holes and imaginary bond vigilantes, and the fanciful need to keep the markets happy,' said Dario Perkins, a former Treasury official now at TS Lombard. 'It is all absolute nonsense. We have tried a decade of austerity and if they seriously do it again, they will be unelectable for a generation,' he said. Chancellor Jeremy Hunt has even gone so far as to recruit the architect of that fiscal squeeze, Rupert Harrison, to help formulate Austerity 2.0. There is a revealing conversation with Mr Harrison in Aeron Davis's new book on the Treasury - Bankruptcy, Bubbles, and Bailouts - that captures what happened. 'When I asked him directly about the broader inspirations of his economic thinking, Harrison responded that he had no interest in macroeconomic thought. His policy views were 'shaped by more general reading' and by being 'a centre-right leaning person'.' Indeed, the fiscal squeeze from 2010 to 2015 never had anything to do with economic science. It was an ideological use of the global financial crisis to shrink the state, creating the OBR along the way as a screen of policy legitimacy, and all dressed up with the discredited theory of 'expansionary fiscal contractions'. We will find out soon how OBR came up with a £70bn fiscal shortfall, but a large part of it must come from assu){kind=link}
The black hole we need to worry about is recession
Here we go again. The Office for Budget Responsibility (OBR) has discerned an enormous deterioration in public finances, allegedly reaching £70bn a year by the middle of the decade.
Upon this macroeconomic conjecture, it is bouncing the British Government into pro-cyclical fiscal tightening just as the country enters what is forecast to be the most protracted slump since the Great Depression, with an output gap (slack) reaching 3pc of GDP by 2024 under the Bank of England’s forecast. The Sunak-Hunt duumvirate appears willing to be bounced.
They deserve our national gratitude for eliminating the sovereign risk premium on the Truss mini-budget – a fleeting episode, ultimately of no importance – but they now risk committing the greater and longer lasting error of Austerity 2.0. That way lies certain failure.
Perhaps Chancellor Jeremy Hunt is talking up his “eye-watering” cuts as political theatre, only to surprise us on Thursday with milder shock therapy than feared. He clearly intends to push most of the pain into the mid-2020s – backloading in the jargon – which gives him a way out later.