On the day the Nobel prize for economics was announced in Stockholm, a former winner was in London urging the government to ditch the "mad" austerity policy that was keeping the British economy depressed. Paul Krugman joined Jonathan Portes for a debate on whether the government had gone too far, too fast.
Krugman made three points. Firstly, that the government should be borrowing more, although he was not sure how much more. Secondly, the arguments against borrowing – the bond markets will wreak terrible vengeance and getting tough with the deficit will boost confidence – were false. Thirdly, and perhaps most important for the political debate between George Osborne and Ed Balls, Krugman said not all of the overshoot in government borrowing this year could be put down to austerity.
Portes put a figure on the amount of borrowing needed, an additional 2% of national output – £30bn – every year until there was a self-sustaining recovery. With real interest rates so low (around 0.5%), he said this would cost £150m to finance, equivalent to the amount Osborne was planning to raise from the pasty tax.
Osborne may well announce in the autumn statement a delay in hitting the coalition's target of stabilising debt. But what Portes is urging would be a bigger stimulus than Gordon Brown's government provided at the depths of the recession in 2008-09. Krugman might not be worried about the bond market vigilantes, but Osborne is. It's not going to happen.
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