Duncan’s Economic Blog

Yet More Sensible Economic Commentary…

Posted in Uncategorized by duncanseconomicblog on October 7, 2009

from a certain Mr K Livingstone

In reality, claiming that cutting public spending is the main issue facing the country, makes as much as a doctor focusing purely on the symptoms rather trying to cure the disease which causes them.

The position of public finances has deteriorated for two reasons. First, because bailing out the bankers and their shareholders is projected to cost a mind-boggling 9.5% of GDP in the current financial year. Second, because the worst collapse in economic growth since the second world war has seen tax revenues fall by a projected 3.4% of GDP this year.

The only way out of the crisis, including the deterioration in public finances, is not cuts or attacks on public sector pay, which will make a bad situation worse, but a restoration of economic growth.

That requires tackling its real cause, a huge drop in private investment.

If we take the components of demand in the economy, up to the first quarter of the year, private consumption fell 1.8%, government consumption rose just 3.7% but investment fell by a massive 14.7%.

This trend has continued. In the second quarter business investment was fully 28.2% lower than in the same period last year.

The only way to stabilise public finances is to restore economic growth, and the only way to do that drastically raise the level of investment in the economy.

(My emphasis)

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