Plan B for the economy

I’ve never been in favour of the government’s Plan A for the economy – austerity in a recession was also going to risk pushing economy back into double dip recession and simultaneously fail to reduce the budget deficit. Even if the austerity was mild by comparison to the rest of Europe, it was just enough to prevent any strong recovery. It is this lack of recovery which has repeatedly caused government borrowing figures to disappoint. Trying to reduce the budget deficit when you have high unemployment and zero growth is a bit like pushing a rock uphill. Not impossible, but it’s much easier to push the rock down a slope. If you want to reduce a budget deficit, create a recovery, reduce unemployment, and it will be less painful for everyone. But, in politics, unfortunately there is often a strong incentive to play the ‘we deserve the pain’ card. (Political appeal of austerity)

Despite initially backing the government’s austerity drive back in 2010, the IMF have now produced a report stating that basically, the government should borrow an extra £10 billion to invest in infrastructure and business tax cuts. Only when the economy has escaped the repeated faltering attempts to recover, should it cut government spending and the deficit with confidence.

Plan B

  1. Be willing to borrow an extra £10billion this year
  2. Invest in public sector infrastructure. This will provide an injection of demand, create jobs and a positive multiplier effect. The increased government spending will help counter the continued weakness in private sector spending
  3. Business tax cuts. The IMF argue tax cuts for business will create incentives for investment. (Closing the loopholes of Amazon, Google and Apple should be a very high priority)

In addition, the IMF suggest trying a different form of Quantitative easing. Buying assets other than government bonds. The purchase of government bonds haven’t really filtered through into the economy. Buying mortgage bonds or corporate bonds may do more to stimulate bank lending.

It’s not exactly, the most radical plan, but it makes much sense than the alternative of strangling the recovery and risking a continued period of low growth. The UK economy has seen several false dawns in the past five years. There is always a mix of data which allows people to cherry pick their favoured outlook. But, however, you look at the UK economy, the over-riding impression is of uncertain recovery, cery weak growth, and an economy that has been more or less stagnant in terms of GDP since 2007. There is a high cost of failing to reach escape velocity.There is a high benefit of escaping the cycle of stagnant growth.

The government is caught between timid efforts to boost economic growth, and timid efforts to reduce the budget deficit. Neither is really working. The problem is they lack the confidence to go for growth and let the recovery take care of the deficit.

Combined with a loosening of monetary policy, this creates the potential for a real recovery. This has been the main macro-economic objective since 2008, but unfortunately, it has often been relegated in importance.

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By on May 23rd, 2013

2 thoughts on “Plan B for the economy

  1. The IMF’s suggestion that infrastructure spending is good way out of a recession is one of the most moronic ideas I’ve ever come across.

    Many infrastructure projects take years to plan and get going – never mind the time taken to complete them. And by that time the recession will probably be over, plus we’ll quite likely have entered the next recession and escaped that as well.

    Moreover, big increases in one type of spending normally mean running straight into shortages of relevant types of skilled labour.

    Of course the amount spent in infrastructure should be constantly under review, and such spending should be increased or reduced from time to time. But that’s all LONG TERM stuff.

    What’s needed in a recession is more spending on as wide a selection of items as possible – public and private sector.

    Bill Mitchell (Australian economics Prof.) has frequently claimed that the IMF is not fit for purpose and should be closed down. I’m inclined to agree.

  2. Tory voter I take it then, Ralph?

    Either way, you’re very wrong. The benefits of infrastructure investment don’t only occur once the, say, road or railway is complete, they occur instantly as people are employed, manufacturing is ramped up, and money flows.

    Besides, I find the very idea that you put forward – that one should not invest in something because its benefits are long-term – bewildering wrongheaded. That said, I suppose Tories don’t have much cause to think beyond the next general election.

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