PRIME readers will be familiar with a paper The Economic Consequences of Mr Osborne co-written by Prof Victoria Chick, Douglas Coe and myself, back in June 2010. In it we argued that 'fiscal consolidation does not ‘slash’ the debt, but contributes to it, as the extent of economic recovery becomes increasingly uncertain'. We examined a century’s worth of UK macroeconomic evidence to argue that, contrary to conventional wisdom, we need to ‘spend away the debt’. Or to paraphrase Keynes, 'expenditure creates its own income'.
We are therefore delighted to publish this recent study by Prof. W. D. McCausland and Prof. I. Theodossiou of the Department of Economics and Centre for European Labour Market Research at the University of Aberdeen, which extends the analysis beyond the UK, and examines the impact of government stance on public debt for eleven OECD countries for which data on the relevant factors are available from 1881 to 2011. Contrary to the conventional view, over this long historical span, fiscal contractions deteriorated rather than improved public debt as a percentage of GDP.
Prof. McCausland and Prof. Theodossiou's study reinforces the case we made in The Economic Consequences of Mr Osborne in 2010 - namely that fiscal austerity exacerbates the lack of demand and deteriorates rather than enhances the prospects of economic recovery.
Read the full publication here: The Consequences of Fiscal Stimulus on Public Debt: A Historical Perspective