Will The Cuts Make The Deficit Worse?

[waitingscot]

This economist thinks it might:

Is it time to change course?

[porca misèria]

Worse than what?

Worse than (is admitted) now? Could be.

Worse than if we were in Ed Balls-style denial? No way!

[Damik]

This economist thinks it might:

Is it time to change course?

will the Greek style crises make the deficit worse?

[interestrateripoff]

The problem is the country is hooked on deficit spending, it's more like asking would giving less heroin to an addict make them more of an addict.

You cannot solve a debt problem by creating ever greater debt, although in a debt based monetary system that is your only solution.

There is no pain free way to sort out the mess we are in, it's going to be like going cold turkey it will be very tough and very painful, but afterwards we'll see the world in a far better way.

[aa3]

There is also heroin addicts who will die if you don't give them enough of the drug.

We are so addicted to debt, and being debt slaves to bankers that it seems hard to change. For example if each job costs £50,000 and we wanted to close the whole £175 billion deficit.. we would have to fire 3,500,000 people.

This would cause a dramatic drop in tax receipts, catastrophic defaults on mortgages, and massive drop in consumer spending. Likely leading to an Irish/Greek style deflationary collapse.

We would be better off going through it though, as it is the only way we are going to break our addiction. And it *might* not be too late fo us. Otoh we may already be past the point of no return, and in that case you have to keep getting the drug to survive.

[needsleep]

None of the parties will tell you that we are due to go through an upswing in the economic cycle by the end of this parliament. The basic difference between their approaches is Balls believes that the upswing will start to take care of the structural deficit naturally and that within say two parliaments it can be elimininated - keep growing, keep receipts up and we will make headway. Osborne believes he can make cuts and still enjoy the upswing which if he is right will make his structural deficit elimination plan look spectacularly successful.

Neither prospect looks appetising. Don't cut fast enough and we face a debt-fuelled melt-down at the hands of the markets. Cut too much and the economic cycle is streched out with the upswing perhaps delayed and happening more slowly - then we have the quarter on quarter negative growth, business failures, unemployment, reduced receipts etc... and the markets will destroy us anyway.

Of the two Balls appears to be the most pragmatic. He's swallowed his pride and accepted the need for cuts but he's a wily operator and if you watch carefully what he's saying he's clealry open to more changes of direction. You have to admire Osborne for sticking to his guns even if he could be completely wrong. Bless him.

[aa3]

I agree with your analysis on the two positions.. but what I wonder about is the assumption of the upswing. A key assumption in all the projections was that the UK would rebound strongly after the recession.. even stronger than the industrial powers of France and Germany.. which seemed questionable to me.

But these reports were prepared by finance guys who assumed Britain would be stronger as it had followed all of the advice fo the finance guys.

But to see negative growth in a good period, starts calling that assumption into question.

[interestrateripoff]

It will probably make the debt to GDP ratio worse.

[ralphmalph]

None of the parties will tell you that we are due to go through an upswing in the economic cycle by the end of this parliament. The basic difference between their approaches is Balls believes that the upswing will start to take care of the structural deficit naturally and that within say two parliaments it can be elimininated - keep growing, keep receipts up and we will make headway. Osborne believes he can make cuts and still enjoy the upswing which if he is right will make his structural deficit elimination plan look spectacularly successful.

Neither prospect looks appetising. Don't cut fast enough and we face a debt-fuelled melt-down at the hands of the markets. Cut too much and the economic cycle is streched out with the upswing perhaps delayed and happening more slowly - then we have the quarter on quarter negative growth, business failures, unemployment, reduced receipts etc... and the markets will destroy us anyway.

Of the two Balls appears to be the most pragmatic. He's swallowed his pride and accepted the need for cuts but he's a wily operator and if you watch carefully what he's saying he's clealry open to more changes of direction. You have to admire Osborne for sticking to his guns even if he could be completely wrong. Bless him.

The timing is political not economic. The Torys can not go into the next election with cuts still being implemented. They have to get the cuts done quick to offer goodies to the electorate which means tax cuts to all. There message will be we have cut out labour waste, the health service is still here (less PCT middle management), you kids are being educated in schools free from the LEA (all sacked) and you have more money to spend.

Also if people think that the Project Merlin talks with the banks are anything other than the Torys getting an agreement from the banks to go free and easy with mortgage lending in the two years before election date then people are misguided.

[needsleep]

Well the apparent difference between the two factions is cutting the deficit in 5 years versus 7.

I wouldn't get too excited about defending your heroes.

At the end of the day, the reason we need any cuts at all is New Labour, Blair, Brown, Balls, Milliband.

It's perfectly reasonable to argue that we have a large deficit mainly because we bailed out the banks during a and near-meltdown of the global banking system and subsequently used Keynesian economic stimulus to counter the effects on the UK of a global economic crisis. It's also reasonable to argue that structural deficit can be eliminated (or created) by economic cycles. But it's a bit too easy (and lazy) just to lay blame rather than discuss exactly why we are where we are. I'm not saying we got it right but I'd rather not be the equivalent of the miserable little kid in the playground crying and saying "he just hit me" .

[onesmallstep]

The outcome will effectively be neutral, same deficit, more debt, more unemployment. The only way is to let the whole thing crash and burn.

[needsleep]

The timing is political not economic.

It's a bit of both. It has to be.

[Riedquat]

and subsequently used Keynesian economic stimulus to counter the effects on the UK of a global economic crisis.

We spent money saved during good times to keep things going dduring the bad ones did we? I must've missed that.

[Damik]

There is also heroin addicts who will die if you don't give them enough of the drug.

We are so addicted to debt, and being debt slaves to bankers that it seems hard to change. For example if each job costs £50,000 and we wanted to close the whole £175 billion deficit.. we would have to fire 3,500,000 people.

This would cause a dramatic drop in tax receipts, catastrophic defaults on mortgages, and massive drop in consumer spending. Likely leading to an Irish/Greek style deflationary collapse.

We would be better off going through it though, as it is the only way we are going to break our addiction. And it *might* not be too late fo us. Otoh we may already be past the point of no return, and in that case you have to keep getting the drug to survive.

you are a funny guy ....

Irish/Greek style collapse is not caused by cuts, but by extensive spending ...

if Irish/Greek cut before the collapse, they would be much better off now .....

[Damik]

None of the parties will tell you that we are due to go through an upswing in the economic cycle by the end of this parliament. The basic difference between their approaches is Balls believes that the upswing will start to take care of the structural deficit naturally and that within say two parliaments it can be elimininated - keep growing, keep receipts up and we will make headway. Osborne believes he can make cuts and still enjoy the upswing which if he is right will make his structural deficit elimination plan look spectacularly successful.

Neither prospect looks appetising. Don't cut fast enough and we face a debt-fuelled melt-down at the hands of the markets. Cut too much and the economic cycle is streched out with the upswing perhaps delayed and happening more slowly - then we have the quarter on quarter negative growth, business failures, unemployment, reduced receipts etc... and the markets will destroy us anyway.

Of the two Balls appears to be the most pragmatic. He's swallowed his pride and accepted the need for cuts but he's a wily operator and if you watch carefully what he's saying he's clealry open to more changes of direction. You have to admire Osborne for sticking to his guns even if he could be completely wrong. Bless him.

do not you really see the difference between the melt-down and the recession ??? do you think that IMF has enough money to bail out UK ???

[Bloo Loo]

It's perfectly reasonable to argue that we have a large deficit mainly because we bailed out the banks during a and near-meltdown of the global banking system and subsequently used Keynesian economic stimulus to counter the effects on the UK of a global economic crisis. It's also reasonable to argue that structural deficit can be eliminated (or created) by economic cycles. But it's a bit too easy (and lazy) just to lay blame rather than discuss exactly why we are where we are. I'm not saying we got it right but I'd rather not be the equivalent of the miserable little kid in the playground crying and saying "he just hit me" .

we have a large deficit becuase we spent too much.

whether it be on Private banks or Overseas Aid....Government is too large.

[spongeh]

we have a large deficit becuase we spent too much.

whether it be on Private banks or Overseas Aid....Government is too large.

Sorry but don't we have a large debt because we spent too much and a large deficit because we are spending too much?

[Bloo Loo]

Sorry but don't we have a large debt because we spent too much and a large deficit because we are spending too much?

well, absolutely correct...but governments tend to borrow as and when they need to...hence the borrowing figures are either better or worse than expected...

[Si1]

the OP is absurd - this economist is saying that cutting the deficit may weaken the economy - this is common knowledge among labour and conservative economists, Roger Bootle (a tory) for example has been very clear about this.

In the event of a double dip all they will do is lower TAXES but carry on public sector restructuring/cuts, this is de facto tory policy.

I notice the O.P. is from the Guardian - shock horror simple economics made into some kind of evil cuts headline. Shows just how low the level of economic debate has fallen in the left.

[Si1]

we have a large deficit becuase we spent too much.

whether it be on Private banks or Overseas Aid....Government is too large.

indeed, what was it before the financial crisis - about 6% or so? It was big and then it went huge with the crisis.

Newsnight last night, Nigel Lawson and Alastair Darling - Lawson said the deficit was large because of Gordon Brown as chancellor and his poor stewardship of the economy. Darling nodded in subtle agreement!!!

(Darling is not a bad bloke in my opinion, he seems to be a politician who is committed to trying to do some good albeit with ideology different to mine, as opposed to Brown who was an ego-driven fruitcake)

Edited January 26, 2011 by Si1

[sleepwello'nights]

Its all a load of ********. The sun still rises in the east, night turns to day, winter to spring.

There is no money, money is a fiction, the banks were bailed out by promises. The cuts we need are to reduce the absurdly high level of taxation we pay. To give us the freedom to exchange our labour for what we each really want, not what the government tells us we need.

[Goat]

Is it time to change course?

Do we have a choice?

The market says no.

[aa3]

I think we should take a second look at the 'we' spent too much. The national debt of the UK is under 70% of gdp, healthy for an industrialized nation and below average historically for the UK.

A cartel of bankers lent absurd amounts of money around the world and took large losses on those loans. And by choice our own government decided to back up every one of those losses.

To take Ireland as an example the Irish national debt at the start of the crisis was just 22% of GDP. But the private banks had liabilities 900% of gdp. It was when Ireland betrayed its own people and stood behind 100% of the losses of all its banks, and those losses mounted so fast it blew up the finances of the state.

Greece - I think people have a point about Greece's govenment spending too much. Their national debt was over 100% of gdp going into the crisis I believe. And this on a pretty shaky economy. I do not believe Greece's banks had been especially reckless or borrowing abroad.

Edited January 27, 2011 by aa3

[Vagabond]

I think we should take a second look at the 'we' spent too much. The national debt of the UK is under 70% of gdp, healthy for an industrialized nation and below average historically for the UK.

Couple of points if you wouldn't mind

What is the debt forecast to peak at? Is this still healthy?

Have you looked at pension commitments and PFI?

Why is borrowing a years worth of GDP 'healthy' for an industrialized nation?

Also, where you say we should take another look at where 'we' spent too much.. Its the private debt of GB which is really horrifying. Tis the public that are being bailed out with low rates.* 'We' spent far too much.

*Well, the banks are being bailed out by not having vast swathes of the population default on them but you know what I mean.

[onesmallstep]

We will default either soon or later and so will the pigs.

Cutting or not cutting will make it worse.