Monday, February 9, 2009

What More Could the Government Do?

A reader left a comment - Is there anything more we could do to solve the recession?

The answer is not very much.
  • Monetary Policy - Interest rates have been cut with unprecedented rapidity from 5% to 1%. The MPC may well cut them from 1% to 0%, but, lower rates will have an increasingly limited impact on boosting growth
  • Fiscal Policy - The UK government are forecast to borrow £120bn this financial year. At nearly 9% of GDP, they would be very reluctant to borrow more for fear of worrying credit markets at the speed of the deterioration in government finances.
  • Exchange Rate. Being outside the Euro has allowed the pound to depreciate helping to make UK exports more competitive. But, with a global recession, demand for exports has stayed stagnant despite the depreciation.
  • Quantitative Easing. If deflation occurs, we will need to try quantitative easing to avoid deflationary pressure.

The problem is that we are suffering a painful correction to past excesses. Whilst it makes sense to minimise the extent of the downturn. There is an element of having to live with the correction at least temporarily. There is no magic wand any government can wave to achieve full employment in a couple of months.

Indeed it ironic that many of these policies are encouraging the opposite of what we want in the long term. In the long term we want to reduce government borrowing, private sector borrowing, encourage higher rates of saving and more responsible bank lending.

The problem is that if this all happened straight away, it would cause a very painful fall in output.

Video on What the Government Could do

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