How did Britain end up with such a terrible economic policy? The birthplace of John Maynard Keynes, John Hicks, and other economic giants was just starting to recover from the global financial crisis when its new leaders forced it back into recession with enormous cuts to the public sector. Two years into their government, the failure of the Tories and their coalition partners, the Liberal Democrats, looks like a case of overriding ideology mixed with naïve mistakes.
The British economy is the same size now, roughly speaking, as it was at the end of 2006, well before the onset of the global financial crisis. Since the most recent peak in early 2008, GDP has shrunk by about 3 percent, after adjusting for inflation.
Clearly, the United Kingdom's problems are not all the fault of its current government, which took office in May 2010. After a promising start in economic policy -- independence for the Bank of England and "golden rule" budgeting, which eliminates deficits over the economic cycle -- the governments of Tony Blair and Gordon Brown lost their fiscal discipline and went along too easily as their American counterparts embraced financial deregulation instead of addressing systemic risk. Mervyn King, the governor of the Bank of England since 2003, and the Financial Services Authority, the industry's independent regulator, must also share the blame for the UK's travails.
Yet in the past two and a half years, the current government of Conservatives and Liberal Democrats, led by David Cameron as prime minister and George Osborne as chancellor, has chosen to inflict unnecessary economic pain on its people. The economy was on the cusp of its fifth straight quarter of growth when the government took office, but total employment had fallen for 7 of the past 10 quarters. The new government decided that the time was ripe for massive cuts to public services and employment. Over the next three years, 628,000 government jobs -- about 10 percent of the entire public sector -- would disappear.
As followers of the "fiscal cliff" debate in the United States surely know, a huge cut to government spending at a fragile moment in an economic recovery can risk sending a country back into recession. And indeed, this is what occurred in the UK: three straight quarters of economic shrinkage starting in 2011 and anemic growth thereafter.
How did this happen? Even in 2005, long before their alliance with the Liberal Democrats, Osborne and his cohorts in the Conservative Party were calling government spending unsustainable. As many right-leaning parties had done before them, they called for a combination of tax cuts and spending cuts that would, in theory, reduce the government's deficits.
At the time, the Lib Dems called the Tories' plans "flaky and unrealistic." In retrospect, the rhetoric on both sides was somewhat overblown. The UK's overall debt in the public sector did climb over the next couple of years despite the growth of the UK economy - apparently the result of a political choice to abandon the "golden rule." But the change in debt was only slight, to 36.4 percent of GDP in the 2007-08 fiscal year from 35.1 percent two years earlier.