Tuesday, August 10, 2010

Biggest Problem in UK Economy

David Cameron and Nick Clegg recently wrote to cabinet colleagues that reducing the budget deficit was the "most urgent issue facing Britain".
  • Interesting they make little stress on the issue of unemployment 2.47 million (and disguised unemployment with 5 million on non-unemployment benefits)
  • It is interesting they don't seem so concerned about the threat of a double dip recession and the continued existence of spare capacity.
  • I wonder if they have noticed the experience of Ireland. - In Ireland savage spending cuts were implement to tackle the 'most serious issue' in the Irish economy. The result is a fall in economic growth of -7% and a credit rating downgrade as markets fear with such poor growth the budget situation is likely to deteriorate - despite spending cuts. (Saving and Austerity)
There is a big difference between a long term structural budget deficit and a short term cyclical deficit. There is a long term structural deficit due to factors such as rising welfare dependency, rising pension commitments, and growth of public spending faster than tax revenues). This needs to be tackled, suggestions such as raising pension age are the kind of unpopular decisions the government is correct to look at. I also welcome the look at trying to reduce the welfare trap mentioned by Ian Duncan Smith (creating incentives to work)

However, you can't solve a structural deficit by imposing immediate austerity which pushes the economy back into recession. This can be counter-productive. My concern is the widespread acceptance that we need to suffer; No Pain No Gain - it's almost as if people think - debt bad - and so we deserve another recession.

Undoubtedly, there will be the retort - but the bond market! The bond market won't tolerate anything less than immediate austerity. But, the bond market is yet to explode as many fear, and as Ireland show if you want to reassure the bond market it is also important to maintain strong growth which is vital for reducing levels of debt to GDP.

1 comment:

Anonymous said...

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