Strong Deficit Reduction is the Prudent Approach

Today the last quarter’s economic growth estimate was published. Should the shrinkage of the economy of 0.5% be replicated in the current quarter, we will have a double-dip recession. New shadow chancellor Ed Balls and others will be quick to say that the cuts are too steep and should be reigned in. Even the consensus of the economists thing this is a bad thing.

My belief is out of kilter with the consensus. The primary responsibility of Government is to avert the biggest risks over smoothing out fluctuations. As a result of the last Labour government and the recession, the British government has a huge structural deficit. It means that if there are shocks to the economy before that deficit eliminated, then the Government could face the stark choice of slashing expenditure and raising taxes on the downturn, or default on its debt. This could occur if more European nations need bailouts. It could also occur if the Government loses the political impetus and resorts to higher spending. Or it could occur if, like the last Labour government, the decisions are put off until the conditions are correct all the way through the current weak economic cycle.

Remember that the deficit problem is so large because Labour built up a structural deficit in the good years, and ducked doing anything about it. Then they ducked tackling the deficit earlier as a general election loomed and they had a leader who did not like to make tough decisions. They put spin before the good of the country and now we are paying the price.

If they a better model of the economy than anyone else, and a policy that does not have the contingent risks, then they should tell us. But they had no gumption to make the right and prudent decisions when in government. No gumption to own up now to their wrong decisions. They will have no gumption to enact the corrective policies if they were back in government.

The current Government may need to make even bigger cuts now, not less. The reason is that most of the deficit reduction relies on strong economic growth assumptions

See my earlier blog postings on the issue

The Impact of Labour on the Current Crisis

The Economic Legacy of Labour – A Summary for the Tories

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