The sum of the parts is bleak. As our post-Budget commentary showed (see here) the OBR no longer expect real wages even to recover their pre-crisis peak, and the OBR no longer expect the public finances to be brought into balance.

Yet despite the changed judgements of forecasters about the prospect of a revival in economic growth, there is no sign of government changing its mind when it comes to macro-economic policy. Once more spending cuts were extended for another year, making 13 years in total (and expected to continue). And while investment spending was boosted (or is forecast to receive a boost in the latter years of the parliament’, investment spending will remain lower than in the last parliament, and the UK will remain at the bottom of the international league table (see our post-Budget post).

2. Could things be different? The lessons of history

The origins of the present policy of austerity go back to pessimistic judgements made in the wake of the global financial crisis. With the worst of the crisis over, policy was then based on the idea of the financial crisis indicating the economy living beyond its means. (The fact that there was no inflation – traditionally the indicator of overheating – was ignored.)

Only after retrenchment would growth be able to resume at roughly the same rate as before the crisis. Government also had to retrench, in part because of the costs of the financial bail-out, but also because previous spending plans were based on an assumption of uninterrupted growth. Conversely monetary policy would provide stimulus.

The only relevant precedent to the 2007-08 financial collapse is the implosion that preceded the great depression of the 1930s. And likewise the only meaningful precedent to the scale of the present monetary stimulus was the actions following the great depression.

But, despite the reputation of the 30s as a decade of economic mismanagement, not least excessive emphasis on protectionist policies, a very much more constructive mindset prevailed then, with very different results.

3. Monetary Policy

When it comes to monetary policy, the response from the Bank of England looks pretty similar in the periods following 1929 and 2007. The chart below shows an annual series for Bank rate, with the 1930s and the present shown on the same axis – both start at the peak of the pre-crisis boom according to real GDP per head (see later).

Bank rate, annual maximum