The Risks to Growth from Policies of Austerity

Policies of Austerity


The Risks to Growth from Policies of Austerity

As this is now “a risky and dangerous time for the world economy,” the deep cuts in public spending the British government intends to implement next year will leave the UK “badly exposed to the new economic storm that is coming,” says Ed Balls, who for many years was a key policymaker as a close ally of former finance minister Gordon Brown.

A “perfect storm” is one where “continued deleveraging by banks and the private sector meets premature fiscal retrenchment from governments and a drastic tightening of consumer spending, as tax rises, benefit cuts and rising unemployment hit home.”

Balls says cutting public spending and raising value added tax in these circumstances is “economically foolish.” A lesson of history is that one should be wary of anyone who tells you that there is no alternative to a policy, or that something must be done because the markets demand it.

He identified several examples of major economic misjudgements that were supported at the time by the broad mass of expert and public opinion, with dissenting voices being silenced or ignored, including returning sterling to the gold standard in 1925, the savage spending cuts of 1931 and the austerity package of 1981.

He accused the new government of doing “the exact opposite” of what is needed for the British economy to ride out the coming storm, as it will hit household finances at the worst possible time, without achieving sustainable reduction in state debt or building market confidence.

“We do need a credible and medium-term plan to reduce the deficit and to reduce our level of national debt: a pre-announced plan.. based on a careful balance between employment, spending and taxation – but only once growth is fully secured and over a markedly longer period than the government is currently planning.”

There is much about Balls’ views that I disagree with, but I think he’s right on this issue, which is critically important for policymakers, not only in Britain, but in many other countries. They shouldn’t tighten now, planning to tighten only once recovery is assured.

This wave of financial hysteria over national debt levels ignores the fact that nearly all the current high growth in such debt is not due to irresponsible spending or failure to finance such spending through taxation, but is a consequence of the recession, which has slashed tax revenues and boosted welfare costs.

Too-high state debt is a problem that, in time, must be addressed. But not now.

source and CopyRight OnTarget Newsletter by Martin Spring