I’m trying to be as politically correct as possible here, but it’s not going to work. The FT has reported:
George Osborne pleased businesses by protecting the science budget and softening the impact of the spending review on infrastructure projects, but there were warnings that the government now needed to turn this into a clear strategy for growth.
“Business has been clear: the deficit must be tackled, no matter what. The CSR does the job of setting out how this will be done,” said David Frost, director-general of the British Chambers of Commerce. “We were disappointed that the Government succumbed to political ring-fencing of some spending areas, when it is clear to business that a bigger boost to investment in productive infrastructure and exporting would be the best bet for growth.”
But, he added: “The CSR alone is not enough. The government must now deliver a clear strategy for growth — which in turn will give companies, and especially small and medium-sized enterprises, the confidence to invest. Perceptions matter. Businesses and government must work together to deliver a real year for growth in 2011. This is the only way that the private sector will be able to take up the slack.”
The proverbial is not the BCC, of course: the proverbial are what you think they are, but they might as well be one and the same.
The government will run a deficit as a matter of fact, whatever it does, if it does not change three things because of the following accounting identity, which must hold true:
Budget deficit = Private Savings minus Private Investment plus Current Account Deficit
Business is doing 92% of savings right now.
Households are doing it by cutting their mortgages.
Banks are helping by reducing lending.
Business is not investing — which is why it is saving so much.
And the prospect of an improvement in trade is near enough zero.
So the deficit will continue or grow — as I predict — whatever George does.
And a plan to cut the deficit is meaningless in that case — because it is beyond his control. He can encourage more spending. But he didn’t. Everything he did today will discourage it.
He can encourage more investment. And he did — just a tiny bit — but overall government investment is to fall heavily, so business investment is likely to fall still further.
And nothing we do is going to increase imports.
So the BCC show themselves to have not a clue what they are talking about in saying what they do.
It was only an economic stimulus package — with more spending and a cancellation of a VAT increase — that could have worked today. But we didn’t get it. So there’s not a hope the BCC will get what they now want. And that’s because they actually asked George to deliver a recession today — which is what they’re likely to get.
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You are absolutely correct on the budget deficit equation. It is one of the most unintuitive facts of macroeconomics that even if public spending were to be slashed to zero there would still be a budget deficit because that equation holds true whatever level of public spending the government chooses. It’s just that the deficit would be caused by bond payments and devastation of tax revenues owing to GDP shrinkage, instead of by defence/welfare/healthcare spending. The government will run a budget deficit whatever it does with public spending. The sooner it realises that fact and stops trying to imitate King Canute the better it will be for the rest of us.
Noticed this in my email:
http://www.38degrees.org.uk/page/speakout/tax-cheat-failure#speakout
@Adam Smith Fan
Well….I beg to differ:
King Canute lived in an age when it was traditional for people to be subjects and to pay homage to the monarch, and his followers worshipped him and insisted that the very sea obeyed his commands. He got so sick of this sort of thing that he commanded that his king’s court be moved to the beach so he could PROVE that the sea did not obey his commands.
Mind you, thinking about it, I can see where you get the comparison between Osbourne and Canute, except that Osbourne probably believes his servants and chattels.
I’d like to thank George Osborne for being so economically illiterate yesterday that he’s made it pretty much a certainly that Labour will romp home in the election. In ten days as Shadow Chancellor Alan Johnson has acquired more economic nous than George has shown in 5 years on the job.
Of course the Tory press will try to spin this as hard as they can but once the cuts start to bite, then they won’t be able to hide the fact that this is a mugging of the British electorate.
What cuts ?
It seems that the deficit will not get any worse (or better) with the present budget reductions, but in the [immediate] years to come the deficit will still be there and increasing.
All that happens is that WE get less and still pay more !
Oh: And those that have more will get more, and pay less tax on it.
@JohnM You’ve hit the nail on the head – in many ways this isn’t a deficit reduction strategy, it’s a deficit EXTENSION strategy. It’ll be interesting to see Osborne in a couple of years’ time when he’s STILL got a huge and expanding deficit, trying to pin the blame on Labour…
One of the biggest cuts is to the govt grant to local authorities – 28%. What’s this going to do for social services? Presuming the cut does not include the contribution from National Non-Domestic Rates, it would require an increase in Council Tax by more than 50% to accommodate – that’s if there weren’t a cap on CT – or has that been relaxed recently? Hence local authorities will get most of the flak.