Wednesday, July 15, 2009


Mandy says Prepare for Cuts But Sage Economists Say Do Anything But.

Yesterday Lord Mandelson warned(incidentally, why is his smile so demonic in my picture?) we are in for a ten year squeeze on public spending although the so-called 'front line' services of health, education and police would be protected. Despite this he reckoned 'the next election is open'. I doubt this very much. Labour, in my view, has lost the next election and can only hope to limit the damage over the few months left before that election is held.

The poll reported yesterday revealed that 64% of voters think governnment should be reducing spending now to 28% who do not, while among these respondents, two thirds preferred Conservatives to Labour as the government to apply such cuts. But they could be wrong as one authority suggests they are.

One of the country's leading economists, and former member of the Treasury's Monetary Policy Committee thinks we may well be in for an extended 'semi-slump' as we suffered once the most brutal first stage of the 1930s one receded. He notes too that the longer but comparable US slump of six as opposed to our four quarters suggests we have more punishment to suffer. He concludes with this question:

So I have a question for Gordon Brown, David Cameron and Nick Clegg. What plans do you have to get unemployment down any time soon? If you want to transform a recession into a depression, go ahead and cut public spending. I would advise against it and so, I believe, would John Maynard Keynes. Voters want jobs.

But the budget deficit does have to be cut at some point. It's child's play. Otherwise interest rates go up, sterling is devalued, imports(on which we are absolutely reliant) become even more expensive. And thus we just delay the depression, wiping out the saving of decent people along the way.

Tax increases simply won't deliver the sums we need, and have already been largely exhausted in any case.

People will have to change their lifestyles, and they might as well get used to it now. Less borrowing, fewer public sector jobs. Less Government spending as soon as we get through the worst of this. Only the most myopic would argue otherwise. I suspect education will be difficult to cut, and defence is obviously untouchable under current circumstances. The focus will fall on welfare. Cameron seems to have the ideas here, but does he have the courage. Health will be allowed to dwindle in real terms. And there is enormous scope for cuts in the Civil Service and the enormous state machinery. Painful but necessary.

I understand the Keynesian economic argument(vis-a-vis increased spending during a downturn), and I don't completely disagree with it. But Keynesianism argues that we save during the good times. Brown didn't do this after 2002. We were running huge deficits to "invest" in public services at this time. Of all his mistakes, this is the one he most deserves to be held accountable for next summer.
Not sure but I do know the days of me saying yes sir thank you sir for you donation have long gone.

Perhaps it is time for more people to vote BNP and get a few more ass holes from the so called working class in to government, simple put we have to many rich bastards telling me what I need to do how to spend my money and what I cannot have.

Taxation has reached massive level but the waste by governments. spending money on stupid idea's has to go. £9 billion on ID cards and now he says ah well we will drop it, this has been a habit for to long, £139 billion has been spent in twelve years on special advisor's or as well call them idiots who give money to Labour.

It is time for a new government and if the Tories fuck it up then perhaps my vote will have to go to another party.
It might be helpful to make a distinction here (not my own; this is second hand) between government investment and spending.

Taking investment as spend on capital (buildings, hospital beds, MRI scanners, etc), there is much less need to maintain levels of growth of 3-5% per year which prevailed in capital spend (particularly on the NHS, but also on schools and other bits and bobs). To a significant extent, the buildings have already been built, and the beds and pricey MRI scanners have already been bought. Budgets could (but wouldn't have to) take account of imputed depreciation costs of capital, but this would require much lower levels of growth - perhaps less than inflation (I don't have full data to hand). The important point is that, although this would be a real-terms contraction in numerical terms, it would not be the "painful" contraction which is often touted.

Spending is different. Take the temporary VAT cut, which is a brilliant innovation. This temporary cut will not add to consumer spending in the aggregate (much), but it will encourage individuals to time-shift spending on VATable goods. I am buying a new car this year rather than next because I pay about 2.1% less; others might decide to extend their house this year rather than next for the same reason.

So we might want to make a Keynesian argument for increasing spending now. But a Keynesian argument for maintaining high levels of growth in capital spend is wrongheaded: investment takes a while to affect the labour market (much longer than, say, a temporary VAT cut).

[Re M Oakeshott, I reckon the gilts market could accommodate significantly more public borrowing if the government were able to put forward a credible plan for reducing the deficit over, say, 10 years.]
Thanks for that clarifying comment. Most helpful for us non economists, though easy to understand of course.
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