Wednesday, 26 May 2010

Three economists, four opinions...

Nowadays so much of politics is really economics that the private citizen has to acquire the skills of the economist or retire from the political argument. A case in point is the argument over whether the UK needs a first tranche of cuts, amounting to £6bn, early or later. During the election campaign, Labour and the Lib Dems said we would be prudent to wait: cutting too soon risked damaging the recovery. The Tories wanted "an age of austerity", cut now and cut deep.

Now the ConDem Coalition has adopted the Conservative position and decided that we need the cuts  and we cannot wait until the emergency budget. So much so that the announcement of the cuts was made at a press conference at the Treasury rather than in the House of Commons.

The question for the  rest of us is, who is right? If we cut Government spending deep and soon, will that actually help or hinder the economic recovery?

The OECD has released a report with attached graphs which may help the layman make up his mind.

My interpretation for what it's worth: government spending and exports are the only current engines of growth in the UK (and many other countries). Other engines of growth, such as consumption and investment show no signs of recovery. In the circumstances, cutting that flow of finance surely risks a fragile recovery.

The cuts may be "only" £6billion, but there seems no logical reason to take even that amount away from the planned public service provision with such unwarrented urgency. (And that doesn't include the multiplier argument, i.e. that increased unemployment costs a "double whammy" as more is paid out in benefits while less is gathered in taxes.)

Anyway, read the report, look at the position of UK finances, and make up your own mind.

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