A lot of people are getting very excited about the idea that the coalition's announcements of cuts may be leading to a slowdown in economic growth, Left Foot Forward for example. It certainly does appear that the recovery is stalling a bit, but the front page of City AM offers a pretty massive data point undermining the Keynesian narrative that cuts are the main culprit:
"THE US Federal Reserve confirmed fears of a marked slowdown in the world’s biggest economy yesterday as it made its first step towards extending its emergency monetary policy regime in a significant policy shift.
The central bank said it would reinvest proceeds from its investments in mortgage-backed securities to buy longer-term government debt in a bid to help the faltering economy by keeping mortgage and corporate loan rates lower."
Is it an accident that Britain's economy is being derailed by coalition cuts at the same time as the US economy is suffering for some other reason? Or is it that cuts aren't really the problem?
I would say there are a few possible factors that can better explain a slow down on both sides of the Atlantic:
- Recoveries from financial crises tend to be relatively weak and unsteady compared to recoveries from recessions with other causes.
- Worries about levels of sovereign debt throughout the developed world are undermining confidence. Some of the actions taken by both the Obama administration and the coalition suggest that their approach to dealing with the deficit - including new taxes on business - will undermine returns and therefore put off investors who worry there will be more to come.
- Instead of focussing on building a more competitive regulatory environment to help businesses prosper in the recovery, governments are adding new costs in policy areas from healthcare to climate change.
It is also important to remember that unless this slowdown is entirely due to the coalition's cuts - which seems wildly implausible, weak US growth alone would slow down the UK economy - slower growth would have undermined the last Government's fiscal projections. Borrowing could have turned out worse than expected and we could well have been forced into truly draconian cuts.