We can’t spend our way out of recession, but we can work our way out of it

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I have the following letter in the London Evening Standard today:

George Osborne is wrong in his fears for sterling - national economies are not like households. You do not have to balance the books. As Keynes showed, in a recession when inflation is likely, government spending creates a multiplier effect, especially if you can keep the benefit of that spending within your own economy, with the result that the market recovers. It is the speed of recovery that pays the debt. Cutting services does not come into that equation.

But Peter Mandelson has also got it wrong. Tax cuts guarantee that government money goes into consumer spending, much of which ends up in China. We need that money here. Instead, government spending should go into an immediate employment fillip for the UK economy by paying people to install insulation in homes and to tackle the backlog of repairs in our public infrastructure, such as the 64,000 council homes in Birmingham that need upgrading to meet basic standards. That way we keep people off benefits; those people have more to spend, which provides a consumption boost; others become more confident so they keep spending; we get a green boost for the economy and enjoy the long-term benefit of better housing. That long-term benefit matches the debt repayments so there is economic logic in the equation.

The reality is we can't spend our way out of recession, but we can work our way out of it.

Richard Murphy, director, Tax Research LLP.