The Guardian has reported that:
George Osborne should spread the pain of tough public spending cuts beyond the next two years, according to the OECD in a critique of the chancellor's debt consolidation strategy.
The Paris-based thinktank said in its latest economic forecast that delaying some of the severe cuts planned by Osborne for the financial years 2015-16 and 2016-17 would “lower the impact on growth”.
Unsurprisingly I welcome such advice. I think it appropriate and well reasoned. As I have argued, time and again, when government spending is one of the key components of GDP and there are no indications that the other three components (consumer spending, business investment and the net balance of trade) are sustainably improving then to impose significant cuts in government spending is, to put it simply, economically counter-productive.
As the OECD makes clear, such a policy will reduce growth at a time when many have yet to see any benefit from it. That reduction in growth will, in turn, reduced tax yields way beyond the impact of the cuts themselves, because confidence plays such a key role in the level of total economic activity. It is likely that as a consequence any cuts will be self-defeating: falls in revenue will at least eliminate any gains from reduced spending and the deficit will remain obstinately in place.
The simple fact (and I stress, this is a fact, not opinion) is that in the absence of consumer, investor and international confidence, a government cannot cut its way to closing a deficit. This is the inevitable consequence of the fact that if consumers, businesses and overseas markets refuse to spend in our economy they will, inevitably save, and if all those three groups are saving then as a matter of straightforward accounting or mathematical fact the government must run a deficit to balance the monetary economy and, as the ultimate creator of money within that economy, it has no choice but to do so.
It appears that the OECD has recognised this macroeconomic inevitability. There is, unfortunately, no evidence that George Osborne has done the same. We will know on July 8, when he presents his first budget after the election. If that the budget sets out plans to substantially cut government spending then we will know that he has put dogma above economic reality, and that he is intent on destroying public services whatever the cost to this country, including by imposing real cuts in growth that will hurt everyone within the UK economy.
I wish I could be confident that economic reason will prevail. I am not.
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It’s perhaps asking too much of someone who can’t say what seven eights are to expect them to be familiar with mathematical facts. I see nothing to suggest Osborne won’t continue to pursue his own agenda, one of reinforcing the privileged position of his class, by impoverishing the rest of us till he’s forcibly stopped.
You missed the most important part – why in the first 2 years of the parliament as they did last parliament? Answer – The conservatives are playing politics with the economy itself. Why front load the austerity in each parliamentary term? Answer – They have to leave enough time for them and their friends in the press to recover the ground lost in time for the next general election. Simples.
Richard, mostly spot on but…. the elephant in the room is the debt-based monetary system which is utterly incompatible with a consumer-led economy. No matter what Osborne or BOE might do the current scenario is both dysfunctional and ultimately unsustainable. You belie perhaps a degree of ignorance when you say that “as the ultimate creator of money within that economy, it [the government] has no choice but to do so. This turns the problem on its head – it is the fact that 97% of M3 has been created by commercial banks as debt to themselves that underlies the permanent stagnation we are experiencing in our consumer-led economy – obviously with the exception of the financial sector who have received the benefit/proceeds of QE. the government, of course, SHOULD be the creator of money – or at least 50% of it and perhaps much more. This is not necessarily inflationary – only if too much is created; just as, if too little is created we end up in a recessionary and potentially deflationary downward spiral. The banks are programmed to create Boom and Bust. They need to be reigned in with capital reserve requirements perhaps hiked to 30% – from the ridiculous 2% that was common-place when RBS went down.
Peter
I am very familiar with the theory of money, and broadly subscribe to MMT
My point therefore is that the government is actually the creator of all money – but has given away the right to use that power for social good to banks who have used it for their advantage instead
The distinction is important: banks could not create money if not empowered to do so and would not if money did not give it value by demanding tax be paid in it
Regulation has to be based on this understanding. Positive Money have not got there yet
I’m not sure we’re that far apart and I do, like you, have reservations regarding PM’s total ban on commercial bank created money but….surely the banks can only create money because they are not prevented from doing so by Act of Parliament – rather then the other way round, i.e. being empowered? 1844 Bank Act was allegedly [by PM] meant to prevent banks creating [printing] money but failed to address creation of credit as it was not possible to tell the difference in a credit account between real money and bank created fiat money…… what’s changed?
That’s right
What it ignores is that anyone can create credit – and they do
And one created it can be traded
And then it’s another currency
That’s much worse than having regulated banks
These Tories are very good at coating dogma with reason; so the answer is the former.
Richard
My compliments to you concerning the above.
Having read an awful lot about the 2008 crash, causes of boom and bust, macro versus micro economics since the mid 1990’s (and not professing to understand it all either), your 4-5 lines in answer to Peter Close above offer sublime clarity.
Thank you.