Duncan’s Economic Blog

The economics of the CSR – First thoughts

Posted in Uncategorized by duncanseconomicblog on October 20, 2010

This CSR appears to be guided more by political economy than economics.

I wrote on Monday that the decision to increase the amount of welfare cuts and decrease the amount of departmental cuts was smart politics, but awful economics.

As we get the detail, it seems even worse. Pensioners, who tend to have much higher savings rates that young people (especially those with families) are being spared. In other words George Osborne has choosen to concentrate the cuts on those most likely to spend their cash. The economic hit will be maximised even if the political hit will be, in the short term minimised.

He is taking the cash from those who actually add to demand, rather than those more likely to vote.

The Keynesian case against cutting during a fragile recovery is by now well known. But, in terms of economic effects, not all cuts are equal – some are more damaging than others.

And all the economic empirical evidence (whether taken from the OBR, the credit rating agencies or the IMF) is that taking money from the poorest will mean the biggest economic hit in terms of slower growth.

This CSR will decrease domestic demand in the economy, lowering consumption and in the long run investment. The picture in terms of external demand already looks dire.

George Osborne is systematically knocking away the drivers of recovery.

We are now firmly on the path of Ireland – lower demand, higher unemployment and lower tax revenue. The deficit will not be eliminated through measures which reduce national income.

 

About these ads

15 Responses

Subscribe to comments with RSS.

  1. Peter Kunzmann said, on October 20, 2010 at 1:01 pm

    What do you think the chances are of a double dip following todays announcements?

  2. Keith said, on October 21, 2010 at 4:03 am

    Time for Gideon and the other super wealthy to get out the Bollinger!

    After all we all in it together; unless your part of the 90 per cent who are going to be poorer or Homeless or dead as a result of the Rich Mans cuts by the Rich mans party.

  3. Vino said, on October 21, 2010 at 6:49 am

    The one reduction in payments to the over-65s in the CSR seems to be one that hits poorer pensioners _not the richer ones who can more afford to bear cuts_ – http://www.touchstoneblog.org.uk/2010/10/csr-2010-savings-credit-cut/

  4. Luis Enrique said, on October 21, 2010 at 2:41 pm

    Duncan,

    “We are now firmly on the path of … lower tax revenue”

    ooh I’m tempted to offer you a large bet on that one!

    • Mike said, on October 21, 2010 at 5:25 pm

      Why?

      • Luis Enrique said, on October 22, 2010 at 11:25 am

        because I think despite the CSR, the economy is likely to be flat / grow slowly and tax revenues are likely to rise thanks to VAT increase, bank levy, new 50% income tax band, banks returning to profitability etc. I agree the CSR will depress growth, just not enough to cause tax revenues to fall. Of course I could be wrong!

        what metric are we using Tax/GDP? change in nominal tax revenues? change in deflated tax revenues?

    • duncanseconomicblog said, on October 22, 2010 at 5:10 pm

      In real terms? Would take a small bet!

  5. Carl said, on October 21, 2010 at 5:17 pm

    In order to fund spending (understandably necessary since investment was at a historic low when New Labour came to power) Blair and Brown, under their watch, allowed investment to be done with money that people didn’t have, increasing household debt. In what way, Duncan, can you see investment being funded in an age where anyone on the Labour left should oppose the VAT/credit orgasm that was New Labour?

  6. Mike said, on October 21, 2010 at 9:01 pm

    The IMF say that the CSR will reduce GDP by 1-2% a year.
    There’s also scepticism that another round of QE would have any effect, given the CSR.
    It comes down to the result of US vs China.

  7. Syzygy said, on October 22, 2010 at 12:04 am

    What’s the chances of a second bank bail-out as postulated by NEF?

  8. [...] Duncan / ConservativeHome / BBC / Left Foot [...]

  9. vimothy said, on October 24, 2010 at 4:36 am

    Martin Wolf does bloody violence to Tory economic strategy: http://www.ft.com/cms/s/0/10dabd3a-dbba-11df-a1df-00144feabdc0.html

    Martin Wolf or GTFO–that’s a slogan I’d happily stick to my bumper.

    That IMF chapter looks like a must read as well.

  10. George Irvin said, on October 26, 2010 at 4:57 pm

    ‘The Keynesian case against cutting during a fragile recovery is by now well known.’ It is amongst our friends, but not amongst the public at large. Handbag economics is what most people believe in—in part because New Labour preached it after Thatcher.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 66 other followers

%d bloggers like this: