Will George Osborne pursue dogma or economic reason?

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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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