Tuesday, January 25, 2011

UK Economy Shrinks

I wrote the recent post - spending cuts hurt, on Tuesday before the dire news that the UK economy contracted by 0.5% in the fourth quarter. This really is bad news for the UK economy. Possibly seasonal factors like the exceptionally cold December may have played it's part. But, a contraction in growth is really bad news.

More worrying is the chancellor's thoughts.

"Of course we need to do more to support growth and that is what I am driving at in my budget. That is precisely where I've said the focus needs to be on the budget now,"
Osborne said.'

As far as I'm aware, the budget will continue the process of fiscal austerity, tax rises, spending cuts and job losses. If you cut government spending at a time of falling house prices, rising saving ratios and sluggish recovery, then you are not supporting growth. Vacuous promises to 'promote growth', don't mean much if you are cutting government spending and adding to the unemployment total.

Spending cuts and job losses


rinky.stingpiece said...

Dear Tejvan

I'm beginning to notice a left-wing bias colouring your articles.

It would be nice if you could be a little more objective, at least attempting to play devil's advocate as opposed to banging the Labour drum.

You seem to talk about unemployment as though employment by some large organisation (e.g. public sector one) is the be all and end all.
What on earth is wrong with including entrepreneurship as an alternative to insisting that growth can only be encouraged through mass employment in a huge public sector that can only be afforded by massive regulation and taxation, and a perpetually massive national deficit?!

Hasn't the penny dropped that this is akin to trying to construct an economic perpetual motion machine?!

You're undoubtably well-educated in the sphere of economics, and your site has a lot of potential to inform and educate, but please stop being so tediously left wing; try and be objective and include economically right wing, and alternative perspectives in your analysis as well, and I'm sure your site will prosper.


Pierre Ratcliffe said...

With Rinky
My concern is that right wing and left wing economists almost say the same; growth, development more and more; will our minds be blocked on this forever? can we not have a production and consumption system dedicated to provide us only with what all of us really need and satisfy all in equity? we are reaching the limits of what the planet can sustain; we the richest are getting more than our share; and 7-9 billion people will not get that. Isn'it time that economists start thinking how we can adjust our production and consumption system to meet the challenge?

Ranbir said...


It is fine to say the private sector can help lead growth. But do you think it is wise to give the private sector that kind of burden with public sector downsizing at a time when the private sector does not have the capacity to offset the job losses?

This is the result we've come to. Osborne expects private companies to provide jobs at a time when they themselves are cutting them. He's set a plan in place which is far removed from addressing what is actually going on.

Danny Richard said...


Danny Richard said...

Dear Rinky,

I disagree that this article has a political tilt in the way that you say it has. In my view it is a point made objectively from the perspective of economic efficiency rather than political coloration. The nature of the left-right divide
is a debate relating to the distribution of economic benefits, of how to divide the existing pie. The article however, does not relate to the distribution of the existing pie, but rather to a discussion of what would be the most effective way to grow the entire pie for every participant. This is inclusive of both business and the labour force.

"You seem to talk about unemployment as though employment by some large organisation (e.g. public sector one) is the be all and end all" - the article seems rather to address aggregate growth, which includes the whole of public and private. The public sector is a whole sector, not an organisation.

"What on earth is wrong with including entrepreneurship as an alternative" - the article proposes a course of action to support, not diminish entrepreneurship. The remuneration for entrepreneurship is profit. Therefore under circumstances of negative or weak growth, the opportunity to make a profit is diminished due to lack of spending power in the economy, demand, which therefore disincentivises entrepreneurship. Equilibrium arises where demand is equal to supply, therefore if demand weakens, then this will discincentivise supply (entrepreneurship) until supply weakens to match. Negative growth is not only unsupportive of entrepreneurship, but can even cause existing businesses to cease trading.

"can only be afforded by massive regulation" - regulation is not a form of income. It is a way of ensuring standards of fairness and safety (eg FSA working to reveal corruption cases) are maintained and is a cost to us (for example to salaries paid to regulators).

"a perpetually massive national deficit?" - the article doees not argue for a perpetual massive deficit. On the contrary it expresses concerns that without supporting (note supporting, not causing) economic growth, private sector weakness will diminish their ability to contribute in taxes and therefore weaken the government finances. Public sector expenditure is private sector income. Cutting public sector spending is cutting private sector income, hence private sector growth would be required in order to offset their loss of income from the public sector. So cutting public spending absolutely does take money out of the hands of private enterprise.

"this is akin to trying to construct an economic perpetual motion machine?!" - the economy already is a kind of perpetual motion machine. Noone has the job of forcing economic activity to happen, rather in the UK we try to allow it to function, whilst trying to mend any breakdowns. People choose to try to produce and consume of their own accord, because it is in their interest to do so, and this includes activity in both the public and private sector - noone has to tell you to visit the doctor when ill, you seek to do it of your own accord.

Reading your comment suggests you would like to see Mr Pettinger discuss the for and against on the issue of whether we should cut earlier or later. My understanding is that he has already written on his subject elsewhere.