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Pushing us towards the death spiral

Yesterday the government announced that it was making initial cuts in public spending of £6.2bn largely by cutting what the Chancellor, George Osborne, called “wasteful spending.” These include cuts in consultancy, travel costs and cutbacks in various departments.  But this isn’t the whole picture on government spending reductions as we still have an emergency Budget to come on 22nd June.

A very strong reaction to these moves came from Professor David Blanchflower, a former member of the Bank of England’s monetary policy committee, who has consistently stood out against making expenditure cuts at this early stage.

He said: “As growth gets lower then you will need more cuts and then growth will get lower and then you will need more cuts. So this just seems to me to be pushing us towards the death spiral.”.

“It is a start that we just don’t need. No other country is sensibly doing this kind of action and this seems to me to be basically a very dangerous thing to do.”

There was some good news for the government in that the Office for National Statistics has revised down the amount the government actually borrowed last year from £163.4bn to £156 bn. This was largely due to the fact that tax receipts in March were higher than originally thought.

Having said all this, the budget deficit is still the largest since the Second World War. Also, total government debt stands at £893.4bn, which is 62.1% of GDP.

The current forecast for net borrowing in 2010/11 is still £157bn, so there will still be a large overhang in the budget deficit. But should we be making cuts now or not? The governor of the Bank of England thinks so, as do many commentators. The markets are running scared at the moment about another global collapse. Anything which can restore confidence to the markets that the government is in control is probably a good thing.

But, government savings are someone else’s loss. Cutting back on IT projects and consultancy means that some private sector companies are going to take a big hit. This means less corporation tax paid and possibly some unemployment. This will be added to the unemployment which comes from reducing the public sector workforce. Not only will these workers not be paying tax in a year’s time, they may well be claiming benefits as well. So not only will tax revenue fall but government expenditure may be forced up as well.

Could the current action being taken actually call a halt to the fledgling recovery in the UK as David Blanchflower suggests? Will we have a double dip recession? Only time will tell but the government is playing for high stakes.

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Posted in economic growth, government borrowing, government spending, Gross National Income, macroeconomic policy, Monetary Policy Committee, Public Finances, recession, taxation

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