Leading economists in dramatic U-turn over support for Osborne¿s deficit reduction plan

| August 16, 2012 | 0 Comments

By
Kirsty Walker

18:15 EST, 15 August 2012


|

01:24 EST, 16 August 2012

Economists say Chancellor George Osborne, pictured, should abandon his plan for a new strategy

Economists say Chancellor George Osborne, pictured, should abandon his plan for a new strategy

George Osborne was hit with a major blow last night after leading economists dramatically withdrew their support for his deficit reduction plans.

Twenty prominent economists publicly backed his economic strategy in the run-up to the General Election in a move which the Chancellor hailed as a ‘significant moment’.

But the New Statesman yesterday reported that two and a half years on just one of the economists is willing to back the Chancellor’s strategy.

Nine out of the twenty had lost faith in Mr Osborne and urged him to stimulate growth through tax cuts and higher infrastructure spending.

The others responded by saying ‘no comment’ or that they were ‘on holiday’.

Their intervention will heap pressure on Mr Osborne at a time when the UK is mired in a double-dip recession and the Government is set to borrow £11.8billion more than Labour was planning.

The Chancellor has faced increasing calls to abandon his austerity strategy this week after new figures revealed that the UK had been outperformed by Germany and France in recent months.

Growth figures released on Tuesday showed the UK’s main European competitors were weathering the economic storm more effectively, despite the eurozone standing on the brink of a double-dip recession.

Britain’s performance was as bad as Italy’s – although Rome has begged the EU for help to overcome its debt burden.

The original letter by the economists was seen as a turning point in the run-up to the 2010 General Election as it gave the Conservatives deficit-reduction plan a powerful endorsement.

The letter to the Sunday Times in February 2010 said that the Government’s goal must be to ‘eliminate the structural current budget deficit over the course of a Parliament.’

New figures revealed that the UK had been outperformed by Germany and France in recent months

New figures revealed that the UK had been outperformed by Germany and France in recent months

The economists added that: ‘There is a compelling case, all else equal, for the first measures beginning to take effect in the 2010/11 fiscal year.’

But one of the signatories Roger Bootle, managing director of Capital Economics, now says: ‘If I were chancellor at this point, I would alter the plan, I would stop the cuts to public investment and I might even seek to increase it.

Roger Bootle, managing director of Capital Economics, pictured, said George Osborne should stop cuts to public investment

Roger Bootle, managing director of Capital Economics, pictured, said George Osborne should stop cuts to public investment

‘The key thing is to try and get the private sector to spend its money and that may require a bit of government spending to prime the pump.’

Danny Quah, professor of economics at the LSE, added: ‘The fear that UK borrowing would become overly costly has become much less relevant.

‘That has also reduced the pressure for dramatic debt reduction, compared to the perceived monetary stance at the time I signed the letter.

So, have I changed my mind since signing the letter? Yes. Because circumstances have changed.’

David Newbery, Emeritus Professor of Economics at Cambridge University, said: ‘We need growth, and that requires investment.

‘In a recession bordering on a depression, public investment in infrastructure that has a high pay-off even in good times must make sense.’

The only economist to support Mr Osborne’s plans was Albert Marcet from the Barcelona Graduate School of Economics.

He told the magazine: ‘I am quite sure there is no room for Keynesian-type policies to encourage growth in the fourth year of a recession; there is virtually no economic theory that will support that.

‘I see no urgency to change the schedule in deficit reduction.’

Here’s what other readers have said. Why not add your thoughts,
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The comments below have not been moderated.

The situation is the boss and the result is the final judge. Things have changed, if we had not committed to austerity then, we would not have the option of abandoning it now.

The situation is the boss and the result is the final judge. Things have changed, if we had not committed to austerity then, we would not have the option of abandoning it now.

Slash the state by 50% and pursue an enterprise and growth policy. Burst the asset bubbles, set the tax for the rich and business at 25%, 15% for the middle earners and let the poor pay 5% on earned income. Combining national insurance with income tax. House prices would rise again over time and the state would slowly creep back in.

Are these from the same stable of “leading economists” who predicted similar doom for the similar measures in the 80’s that got us out of the 1970’s mess left by their previous government?

Not surprising – Ed Balls predicted exactly what would happen… and it has. But still daft as a brush Tories point the finger at Gordon Brown rather than their rich toff banking chums.

High taxation + high regulation = unemployment and hardship.

Government is borrowing another £120bn this year. National Debt has doubled over the last 5 years Revenue has fallen, whilst expenditure has increased. Borrowing more will only make the problem worse. Sorry, but cutting wasteful and unnecessary expenditure is the only way to avoid becoming the next Greece. Leaving the EU would be a start, yet another unproductive layer of useless management.

Two totally useless fools whom without daddies money would never have got off the starting blocks. Cameron cannot think things through and make decisions without rethinking or seeing the consequences of his stupidity and U turning, Why? – Well having no experience base, this includes learning from mistakes, if you have done nothing or not had to make decisions about the mortgage or routine day to day decisions you cannot learn, books and degrees do not make up for the school of hard knocks. I have had brilliant (on paper) people working with me, yet it was always a mystery who did the tie and shoe laces up.

Leading Economists? and it has taken them this long to discover that Osbornes strategy is useless ?
I, and many others could have told them that a long time ago!

Unfortunately unless people have some spending power available they wont be spending. The main reason (apart from high utility and petrol costs) is the fact banks are still screwing their customers. With BOE rates at ..5% many mortgage lenders are charging 5-6%. Credit cards 20% plus. Many people are relying on the for groceries.
A temporary cap of say : 4% on ALL mortgages regardless of what deal you signed, would be an enormous help. Even if the government had to temporarily subsidies every mortgage loan in the country it would I am sure worked out less than this do called QE. Loans to businesses has not happened! In theory now the government underwrite 75% of a business loan. Well the way I see it, if yoo currently have a 10 K OD, the bank should increase it to 40K and have no bigger risk as 40K is covered by teh government.

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