On December 5th George Osborne, the British chancellor, delivered the Autumn Statement, where he outlined the British government's economic policy for the next few months. We are hosting a round-table discussion of the Statement and related issues. So far we have had contributions from a think-tank, an economist and a geographer. Next up is Wouter Den Haan, professor of economics at the Centre for Macroeconomics at the London School of Economics.

GEORGE Osborne started his Autumn Statement by saying that “Britain’s economic plan is working”. There is indeed momentum in the British economy and new borrowing by the government is down. Quite a few commentators, relying typically on Keynesian arguments, thought that the coalition’s austerity policy would make attaining both of these outcomes difficult if not impossible. Fortunately, this turned out to be not the case. This does not necessarily mean, however, that the chancellor deserves credit for the recent changes in the British economy’s prospects.

In the community of academic macroeconomists, the crisis has made it very fashionable to work with Keynesian models, especially models in which a lack of demand deepens crises and possibly even prevents a recovery. Several “fresh-water” macroeconomists, who traditionally focus on the supply side, are now considering animal spirits and demand shocks. In fact, quite a few macroeconomists argue that austerity has such a strong negative effect on gross domestic product (GDP) that it would increase the ratio of government debt to GDP. This is remarkable. From the early eighties until the onset of the financial crisis, macroeconomic textbooks taught us that fiscal policy is not effective in dampening business cycles. These days there are many new models that would give politicians justification to engage in fiscal stimulus, at least in the current circumstances. Interestingly, politicians have pretty much ignored these views, except during the initial phase of the financial crisis. Britain's coalition government definitely has done this, but this restraint is not limited to conservative politicians who prefer small governments. This is ironic. One of the traditional reasons that macroeconomists gave against the use of fiscal policy to affect business cycles is that the profligacy and unreliability of politicians would mean that fiscal policy would be hard to implement sensibly. These days, academic macroeconomists want to spend and politicians do not.

Personally, I think that we simply do not have the evidence to know with some degree of certainty what the best fiscal policy would be in the current circumstances. It may very well be the case that we are currently in a situation in which more government spending would have a strong positive effect on the economy. But I am not sure. An important factor contributing to my reservation is the sustained period with low growth and high unemployment experienced by the Dutch economy following the seventies’ oil crisis. When it became clear that traditional Keynesian policies did not work, the Dutch government proposed austerity plans. For quite a while these were not implemented in a credible way and the economy continued to behave poorly. A full recovery in terms of sustainable growth and low unemployment did not occur until the Dutch government got serious about austerity and implemented reforms to make the Dutch economy work better.

Is the recent British experience similar to the Dutch experience described above? Has the coalition’s economic plan restored confidence? Has this stimulated the creation of new jobs? Has the negative impact that austerity has had on demand been more than offset by expectations of a leaner government which led to new investment? If true, will last week’s Autumn Statement reinforce these developments?

I would like to believe that these statements are true, but there are several reasons why this may not be the case. The first is that the recovery is mainly driven by an increase in consumption. Investment is still weak. Even if austerity has ensured that firms are not worried about future tax hikes to finance government debt redemptions, it has not made firms positive enough to start investing more. The second reason is that labour productivity is very low. It is true that quite a few jobs have been created, but they are not very good ones. One would hope that the economic environment is such that high productivity jobs are created that rely on the skills of the British labour force. That does not seem to be the case.

If the coalition's economic policy is not behind the recent recovery, what is? One possibility is that consumers have simply become more positive. Possibly because one can only be pessimistic for so long and/or because the euro zone and other trouble spots seem to have stabilised somewhat. Another possibility is that the invisible hand is doing its job. After all, human beings are quite inventive and the British economy has a smaller number of barriers than many other advanced economies. Finally, one should not rule out the possibility that the recovery is mainly driven by the expansionary policy of the Bank of England. In particular, rates on a wide range of household borrowing have continued to decline and there have been improvements in the availability of credit.

It is possible that Britain's economic plan will at some point encourage investment and the creation of high productivity jobs by reassuring entrepreneurs that taxes will not get out of control. At this point, however, it is not clear whether that will happen.