As the FT notes:
Bad economic news bombarded the Treasury on Monday as new International Monetary Fund forecasts cast doubt on the chancellor's deficit reduction plan, while near-term indicators suggested the recovery was losing the little momentum it had.
The IMF judged that Britain's economy had less capacity to grow quickly over the next few years than the government had hoped, slowing the reduction in borrowing to the point where it comes within a whisker of missing George Osborne's main fiscal target.
They added more bad news after that, but let's stick to the IMF for the moment.
The message is clear - Osborne has set out his stall based on the objective that the deficit should be cut and a downward projection for debt should have been established before the next general election. It was a simple criteria for success or failure. He chose it for that reason. And it already looks certain that he won;t succeed in meeting it.
Osborne's plan required growth - not least massive growth in tax revenues from an economy he thought would boom as he pulled back the state.
But it's not. The reaction to his spending cuts is as any good Keynesian would have predicted: companies and consumers alike are cutting their spending in the face of the very real prospect of hardship that these cuts foretell, including the risk of loss of income, unemployment and having to make payment for services that they reasonably expected the state to supply. This is the paradox of thrift: the rational attempt by consumers and companies to save in the face of attacks on their income and future ability to earn results in a loss of real economic activity, a reduction in income for all, and an inevitable failure on the part of government to realise its objective of reducing its own deficit. That is why, inevitably, George Osborne is not meeting its target.
The downside is that the IMF seems to think that the best reaction to this will be more cuts or tax increases, and that's the exact opposite of what is required.
Will they ever learn, or do we have to sink into oblivion first?
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With so much now leaking out of the economy it is like trying to stoke up an old boiler in which the water levels are falling. If you think of the economy in terms of the old steam locomotives then it is easy to see why the train is slowly but surely grinding to a halt.
The policy of deficit cutting is one with a long history of failure. In fact, there is barely any examples of it anywhere that have actually worked.
Policies that have been a proven success, for most of the time at any rate, was the post-war consensus, where Keynesian-inspired policies of huge deficit spending (250% of GDP up until 1960) provided prosperity for Britain for almost 30 years.
Abandonment of these policies gradually put us on the road to higher unemployment, higher trade deficits and huge cutbacks in public expenditure to balance the books.
Neoliberalism is largely inspired by theory. Keynesian policies have been tried and tested in the real world and have, by and large, been mostly successful.
When it is finally realised that a debt-based economy has to be run by the government going into debt because industry and taxpayers are unable to circulate enough money on their own to keep the economy going, the quicker neoliberalism will be abandoned.
That Osborne’s policy is failing is entirely unsurprising – it’s mathematically impossible to deleverage the private sector AND the public sector at the same time unless net exports take up all the slack and that is certainly not feasible. Our manufacturing sector is too small and too weak.
But there is a problem with Keyneian policies – or at least the simple interpretations that are routinely trotted out by left-leaning folks. Up to the 1960s international trade was sufficiently small (especially if trade in raw materials is excluded) that the benefit of a Keynsian stimulus stayed mainly onshore.
Now they mainly help the Chinese and German economies. Apart from building and infrastructure and suchlike with a relatively high domestic content they do little for the domestic economy; we finish up with extra public debt but don’t get an economy with the extra productive capacity required to support it.
So, to an extent the right have a point – a reflex Keynsian stimulus is not all it once was. Left-liberals need to think about this but mostly don’t. Mostly they are happy to just recycle policies developed in the 1930s. Were Keynes alive today I’m sure he would be saying something different and appropriate to our current circumstances. But what?
Your logic is wrong: it assumes that all the benefit of a stimulus goes abroad because it would all go on material consumption
Actually, that was likely in the 1930s
Now it is very unlikely
Most would go on services, and by and large they’re home produced and consumed
So your logic is wrong on that score
As it is also in fact in general – if the Green New Deal policy on energy investment were ut in that place that spending would be here to reduce foreign exchange exposure
I and others have thought this through
You need to think again
The last time the Keynesian left was in a position to implement demand-led fiscal stimulus policies was during the first two years of Mitterrand’s presidency in Frnace.
Within less than 24 months, the currency had collapsed, inflation shot up and the public deficit had trebbled. Google “tournant de la rigueur” for what happened next.
The left has never governed in France again.
Your usual complete drivel
It worked in the 30s
It worked from 46 to 73
It would work now
But you find a 2 year period in one country and say ‘non’
Very politely – that’s dogma in the face of evidence
Richard,
You have clearly misinterpreted my comment. I did not say that “all” the benefit would go abroad, nor did I say it would al go on “consumption”. I wrote “mainly” although perhaps I should have written “too much” or “a problematical percentage” or some such for clarity.
Much, most even, would indeed go on services – as the largest sector that is inevitable. But what happens then? Unfortunately, the answer is that it sucks in imports of the manufactured elements that are a part of many service industries – especially those that are not narrowly focussed on consumption.
Suppose I (or the government) invests in solar panels or some such Green New Deal investment; the fitting will add to the economy and that is clearly good as far as it goes. But how far does it go? The solar panels or whatever are very unlikely to be produced in this country – most are imported. And, in the long run, it is the manufacture of the panels themselves and all the technology they embody (knowledge-based deconomy in the current jargon) that adds the most value to the economy. Otherwise we are, in effect, just retailing foreign made goods (or installing them) as Stevo says below.
So, I am not saying that we don’t need some sort of boost; only that the strategy of recent govts of throwing money at the problem and then keeping all fingers crossed and hoping some of it sticks is not likely to work too well.
We need to understand what it is that makes govt support stick or fail to stick (or if you prefer, to have maximum impact) and adjust policies accordingly. If left-liberals refuse to take on board that there is a problem then we are in even deeper trouble than I thought.
I’m not refusing to take anything on board
But after discussion with learned people I think you grossly exaggerate your case
There may be some effect – as you describe – but to assume we make nothing here is just plain daft and you ask to be dismissed as a result
You also utterly ignore the fact that i strongly recommend investemnt in manufacturing here
“Now they mainly help the Chinese and German economies. Apart from building and infrastructure and suchlike with a relatively high domestic content they do little for the domestic economy; we finish up with extra public debt but don’t get an economy with the extra productive capacity required to support it.”
The only reason it might help the Chinese and German economies is because previous governments (Thatcher being the main culprit) largely crippled our manufacturing base and have done little to replace it. This wasn’t inevitable, in fact the economices of doing away with nuch of our manufacturing base does not stand up to economic scutiny. It was almost purely for political reasons.
Our manifacturing base needs rebuilding. Investment in sustainable and renewable industries would go a long way towards this.
Instead of being a gigantic warehouse and shopping centre (selling mostly foreign goods) we need to start making things again.
It is the only way to get the country truly moving again.