The growth figures

Sorry to be a bit late off the mark on this issue, I was getting some work done on a big project yesterday.  The growth figures came out and the recession is over... just.  Mark Bathgate has a great blog over at the Spectator Coffee House pointing out just what a disastrous reversal the recession has been:

"Such has been the severity of the downturn though, that, as the above chart shows, GDP has fallen back to the levels of mid-2005. The economy is basically the same size as at the time of the last election. This means for probably the first time in modern British history, living standards have failed to rise for almost the entire duration of a Parliament."
Stephanie Flanders, BBC Economics Editor, has another interesting blog about why the growth numbers are disappointing, but I have to take issue with this section:


"But I'm not sure that a weak recovery plays that well for the Conservatives either. They are being painted as a party keen to clamp down on public spending - and borrowing - from their first days in office.

Even if that's a caricature of their position, it's a caricature that they have broadly accepted. The weaker the recovery, the easier it may be for Labour to argue that the economy is too weak for shock therapy just yet."

That assumes continuing high deficit spending is going to drive growth.  There are quite a few reasons to doubt that is the case:

    • Economists at Goldman Sachs recently wrote a report arguing that, thanks to the effect on interest rates, deficits were more likely to alter the composition rather than the amount of growth.

    • People and businesses are increasingly aware that they are going to have to pay for these deficits in higher taxes and/or lower public spending in the years to come.  That will make firms more cautious about investing, they'll have to take account of the greater risk that the profits on those investments are going to face higher taxes.  And, it will make people more cautious about spending, if they need to be prepared for some big tax bills.  This idea is known as "Ricardian Equivalence" in the economic literature, and I've written about its relevance before.

    • Recent research by Andrew Lilico, for Policy Exchange, has found that countries which successfully made big cutbacks in their deficits tended to enjoy strong growth as the cuts led to increased confidence and lower interest rates.

All the parties should be pledging serious action to cut spending and bring down deficits.  That will be good for the economy, mean that we aren't imposing a huge debt burden on future generations and lessen the risk of a fiscal collapse.  Whatever the Government say, the challenge for the Conservatives is to establish the credibility of their plans to bring borrowing under control, not to accept the Government's crass Keynesianism.
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