Tuesday, October 19, 2010

Spending Cuts Debate

35 Business leaders wrote a letter to the Daily Telegraph stating they support spending cuts as necessary and can't see how it will lead to lower growth.
"As recent events in some European countries have demonstrated, if the markets lose faith in the UK, interest rates will rise for all of us....”

“Everyone knows that when you have a debt problem, delaying the necessary action will make it worse not better...." Spending Review - Telegraph
It does sound like a letter from non-economists. The greatest fear markets will have is negative growth which makes it so difficult to reduce debt to GDP ratio.

David Blanchflower (one of the few economists to predict early the forthcoming recession) rejected this analysis, saying the business leaders "are not economists. It's a terrible, terrible mistake. The sensible thing to do is to spread [the cuts] over a long time".

He has repeatedly described the public spending cuts as the "greatest macro-economic mistake in a century".

"Clearly you have to deal with the deficit, but there is no economics that says you have to deal with it in a week or a month," Blanchflower said on Bloomberg Television. "You have to be mindful of the data and if the data turns down, which it has, you have to adapt."

He added: "The last thing you do in a recession is make things worse." from Guardian link

I have covered this topic before - Economics of Spending Cuts

Though I have been encouraged by signs that the UK growth is looking more promising

1 comment:

Basudeb Sen said...

Spending cuts in a period of recession or sluggish growth is definitely a great mistake in the Great Depression like Kenyesian Agrregate Demand shortfall situation. But large government spending has been a disease of modern economies dominated by profligate governments: recession is an opportune time for tahing the painful pill to cure governments of such bad habit of profigagate spending out of taxpayers' monies and created monies. Not all government spendings contribute to rise in aggregate demand or bring in greater efficiency. The age of 'Dig and fill ponds' wastage of resources to get out of sluggishness in agreegate demand is gone: businesses and households are saving a greater portion of their income currently: government has no alternative but to borrow these savings. Even as governments increase stimulus spending by increased borrowings in order to increase aggregate demand, there is need to stop all government expenditure that is unproductive or have low multiplier effect. Continuing to spend in all sorts of programs by governments are always bad and especially bad in times of recession.
Yes, business leaders are no 100% economists. But they know where their show pinch and know what will hurt them most. If they were certain that government spending will increase the demand for products and services they intend to sell and their prices to go up as a result boosting their profits, they would not have recommended spending cuts. They take the risk of losing money on their recommendation, but the 100%economists' recommendation for against or for government spending cuts are risk-free for the economists. If governments knew how to manage to keep economies free from fluctuating economic growth, recessions and booms would not have arisen in the first place. Governments are simple machineries for spending as much of people's money as possible: in time of boom the argument is increased revenues and in recession times to boost aggregate demand. Governance of spending all the way!!