It seems quite odd to me to proclaim as "keynesian" some sort of mercantilist growth model. More appalling still, such claim often comes with usual orthodox "sound finance" ideology. We can observe such policies in the making in the UK and figure out what might be their results in the current international context. Our take is from an effective demand perspective, one which I believe Keynes himself would recommend.
In Keynes' Britain now we have a Conservative Government. The Chancellor of Exchequer, Mr Osborne, came to power in the aftermath of the 2008 crisis. He announced in April 2011 that Britain had a plan that "Taken together the measures I will announce today are fiscally neutral across the period. This is a Budget built on sound money. A Budget that encourages enterprise. That supports exports, manufacturing and investment." A sort of neo-growth approach I wonder. His forecasts for the years to come at that point indicated that private spending would be substitute for government spending. More, business investment and external markets would lead the way to robust growth. Although UK had a public debt similar in size to that of Greece, the Chancellor heralded that UK paid as low interest rates as Germany. Therefore, investment would be boosted with pro-business policies. Trade surplus was a matter of exchange rates and lower wages. Private consumption would not be the growth leader as before, specially financed by debt. In Mr Osborne's growth model I suppose foreign markets and private investments are virtues to be stimulated and public deficits and consumption spending are vices to be avoided. The following table and chart below show what would be Chancellor's dreams, his neo-growth model arriving in less than three years. That is, forecast by Treasury pointed that in 2013 above half of UK growth would be brought by investment and trade surplus, whereas the government contribution to growth would fade away.
In Keynes' Britain now we have a Conservative Government. The Chancellor of Exchequer, Mr Osborne, came to power in the aftermath of the 2008 crisis. He announced in April 2011 that Britain had a plan that "Taken together the measures I will announce today are fiscally neutral across the period. This is a Budget built on sound money. A Budget that encourages enterprise. That supports exports, manufacturing and investment." A sort of neo-growth approach I wonder. His forecasts for the years to come at that point indicated that private spending would be substitute for government spending. More, business investment and external markets would lead the way to robust growth. Although UK had a public debt similar in size to that of Greece, the Chancellor heralded that UK paid as low interest rates as Germany. Therefore, investment would be boosted with pro-business policies. Trade surplus was a matter of exchange rates and lower wages. Private consumption would not be the growth leader as before, specially financed by debt. In Mr Osborne's growth model I suppose foreign markets and private investments are virtues to be stimulated and public deficits and consumption spending are vices to be avoided. The following table and chart below show what would be Chancellor's dreams, his neo-growth model arriving in less than three years. That is, forecast by Treasury pointed that in 2013 above half of UK growth would be brought by investment and trade surplus, whereas the government contribution to growth would fade away.
The table below from the British Office for National Statistics shows that Mr Osborne 2011 plan was nothing more than wishful thinking. Both business investments and foreign markets have failed to fulfill neo-growth expectations upon their capacity to recover and balance the UK economy. Why? Usual suspects are relative prices. Would have interest rates increased and distressed investors? No, it doesn't seem the reason as long term UK interest rate is about half of that before the crisis inception. Would have exchange policy impaired manufacture exports and boosted imports? It doesn't seem to be the case either as real effective exchange rates are still about 20% depreciated in relation to 2007. So, it seems that the neo-growth approach of Mr Osborne is not working at all. His forecast as from 2011 failed to even slightly occur.
Those following Keynes approach know that when uncertainty is on the rising, relative prices moves can only bring more doubts and uncertainty. As mere changes of relative prices are unlikely to boost confidence and demand, the best thing to do is to increase effective demand directly. When policymakers are not able to understand that, automatic stabilisers may intervene and set a floor to the fall. How high is that floor depends on institutional characteristics of fiscal stance. That seems to have happened to UK, despite Mr Osborne austerity budget intentions. Whereas trade surplus and investment failed to lead the growth, household consumption and government deficit spending automatic stabilisers avoided that Mr Osborne's unsuccessful growth plan turned into plain catastrophe. The neo-growth model based on foreign markets and business investments in the mid of this crisis is not only ideological but also blind. With its neighbours in ruthless recession and everyone else protecting their domestic markets the mercantilist growth model is a recipe for disaster. Fortunately, the domestic expenditure reverted the results that the uncunning neo-growth model proposal would lead without government and household consumption. But, against evidences, Mr Osborne is adamant to think his model is working.
Ideology with bad analytical tools have done so much damage for the UK and other EU economies that one gets forgiven if s/he thinks that the economy is governed by nothing else than plain vested interests.
Sources of Data used:
http://www.oecd-ilibrary.org/sites/csp-gbr-table-2013-2-en/index.html?contentType=/ns/KeyTable,/ns/StatisticalPublication&itemId=/content/table/20752288-table-gbr&containerItemId=/content/table/20752288-table-gbr&accessItemIds=&mimeType=text/html
http://webarchive.nationalarchives.gov.uk/20130129110402/http://www.hm-treasury.gov.uk/2011budget_speech.htm
http://www.ecb.europa.eu/stats/money/long/html/index.en.html
http://www.bankofengland.co.uk/boeapps/iadb/index.asp?Travel=NIxSTxTIx&levels=1&XNotes=Y&G0Xtop.x=31&G0Xtop.y=9&C=M4Y&C=M4Z&XNotes2=Y&Nodes=X3951X3952X3955X3958X3961X3965X3969X3972X3975X3978X3981X3985X3989X3992X3995X3998X4001X4004X4007X4010X4013X4016X4019X41107X41122&SectionRequired=I&HideNums=-1&ExtraInfo=false#BM
Ideology with bad analytical tools have done so much damage for the UK and other EU economies that one gets forgiven if s/he thinks that the economy is governed by nothing else than plain vested interests.
Sources of Data used:
http://www.oecd-ilibrary.org/sites/csp-gbr-table-2013-2-en/index.html?contentType=/ns/KeyTable,/ns/StatisticalPublication&itemId=/content/table/20752288-table-gbr&containerItemId=/content/table/20752288-table-gbr&accessItemIds=&mimeType=text/html
http://webarchive.nationalarchives.gov.uk/20130129110402/http://www.hm-treasury.gov.uk/2011budget_speech.htm
http://www.ecb.europa.eu/stats/money/long/html/index.en.html
http://www.bankofengland.co.uk/boeapps/iadb/index.asp?Travel=NIxSTxTIx&levels=1&XNotes=Y&G0Xtop.x=31&G0Xtop.y=9&C=M4Y&C=M4Z&XNotes2=Y&Nodes=X3951X3952X3955X3958X3961X3965X3969X3972X3975X3978X3981X3985X3989X3992X3995X3998X4001X4004X4007X4010X4013X4016X4019X41107X41122&SectionRequired=I&HideNums=-1&ExtraInfo=false#BM
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