Austerity blues or going for growth?

20 10 2010

The discussion dominating public debate about how far and how fast we should be cutting the fiscal deficit is a giant displacement activity, which has dangerous consequences. The real problem facing the UK, and other western countries, is how to regenerate economic growth.

Whenever there is a sharp economic recession,  governments respond by artificially stimulating demand in the economy, through increasing public spending, interest rate cuts or tax cuts. Once the crisis starts to recede these emergency measures are gradually withdrawn. Almost all of the current public debate about the economy is about the speed of withdrawal of the stimulus. Nobody knows what the right speed is so this one will run and run, at least until the economies are back to normal.

However, it is what constitutes normal in this regard that we should be most interested in. Most western economies have seen real economic growth rates stagnate over a long period of time. Indeed it is this very stagnation which helped to fuel the spectacular credit boom that ended, at least temporarily, two years ago.

There are two ways in which the current preoccupation on cutting the fiscal deficit is dangerous. One is economic and one is social. The economic danger is that by focussing on public spending cuts we are ignoring the need for the state to actually invest far more in key areas of the economy than is the case now. The state plays a pivotal role for example on giant infrastructure projects which private business shies away from. In the UK this includes amongst other things new roads, railways and nuclear power stations. An obsession with cutting public spending does not create an atmosphere which is very conducive to more long-term spending commitments. Indeed it is often the longer term projects which get cut first as they have a smaller political constituency to offend.

The social danger is that the focus on cutting public spending is incredibly divisive and demoralising. Most people in the UK are now indignant either about how far their benefits are going to be cut, or why the benefits of others are not being cut more. While this creates short-term divide and rule advantages for the government, as people are blaming each other for what is going on, it has longer term dangers. An introverted obsession with minor changes in universal benefits or the funding of education does not help us address the bigger problem of how to inject a shot of dynamism into the UK economy. We are not yet asking the right questions about the future of the UK. If all our energies are devoted to holding on to meagre state benefits, rather than working on the bigger prizes that real economic growth can bring, then there can only be more stagnation to come.

*This blog also appeared in The Independent

** I will be chairing a debate on this subject at The Battle of Ideas next week

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