Thursday, 27 January 2011

“If you do not have growth, you will never cut the deficit.”

That is a quote from Ed Miliband from this week's PMQ's.  This is absolute nonsense and implies a linear relationship between economic growth and budget surplus/deficit.  Of course, as highlighted by Keynes there should be a positive correlation between the two - when the economy is growing less expenditure is needed/more taxation generated so there should be a budget surplus and when it is in recession governments should stimulate the economy with additional spending.  However if this was a perfectly binary relationship we wouldn't have had years of budget deficit (creating the mountain of debt we already had before the credit crunch) in the "boom" years under the previous labour government.  

There are many examples of how cuts can be made without even impacting on growth at all.  For instance, our international aide (which I am very supportive of) adds nothing to the gross domestic product of our economy, if we didn't pay any of this out the budget deficit would be reduced - growth didn't influence this reduction one bit.  Find cheaper credit for our debt, will reduce our (huge) interest payments and therefore the deficit - again, this didn't come into effect because of growth.

I have always found the obsession with growth rather strange, for me personally I couldn't give a damn if the country is growing or not, surely what matters is the prosperity and living standards of those in the country.  Growth and prosperity are two completely different things.  I also definitely don't see how the Government can generate growth as it only ever spends money taken from it's citizans/businesses (though education could be seen as a growth generator for the future).  Any growth has to be lead by the private sector and private sector investment.  The easiest and most direct method of investing in an economy and then generating the growth (that is so desired) is by giving people and businesses their own money and then allowing them to decide how to invest it.  There are obviously externalities and free rider problems that Governments try to solve but these themselves do not generate growth so I think governments go to far with their spending in a misguided attempt to stimulate the economy, which as a result leads to increased borrowing and higher interest costs forcing them to spend future money on financing at the expense of improving people's lives.

The reaction from the Chancellor was not good enough after the announcement of a contraction of the economy in the last quarter of 2010, he blamed it on the snow.  Yes I'm sure that the snow had some effect, but it wouldn't have wiped off that much of the country's GDP.  Channel 4's fact checker does a lot better job of describing the forces that acted towards this - and also discrediting Miliband's assertion that we are cutting too much too quickly.  It's worth a read.

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