Duncan’s Economic Blog

The Deficit: What we should be saying

Posted in Uncategorized by duncanseconomicblog on October 8, 2009

Chris Dillow has superb post up on the debate around the deficit. I completely endorse his suggested statement:

We haven’t a hope of cutting the deficit significantly by policy measures alone; Osborne‘s proposed measures aren’t just a tiny fraction of borrowing, but are a tiny fraction of the forecast errors for the deficit. Our only chance of getting the deficit down seriously is to grow our way out of it. This requires that the  private sector start borrowing again, which means that policies that “encourage saving”, such as the raising of the pension age, might actually raise the deficit.
If the economy does grow nicely, the deficit will take care of itself. And if it doesn’t, we’ll need a deficit to support the economy, and the chances are that global investors’ demand for government bonds will stay high, so we can continue to finance the deficit easily.
Either way, there’s no point jeopardizing people’s jobs through spending cuts that might be unnecessary or perhaps even counter-productive.
This view, though, is just a probability. There’s a risk to it. There’s a danger that bond markets might take fright at borrowing in future, even though they are relaxed about it now. This could happen if we get decent economic growth – which would cause bonds to sell off anyway – which reveals that the structural budget deficit is bigger than thought.
Should this happen, we might need an emergency fiscal tightening – though as this could well be needed only as the economy grows, it might be justified in terms of ordinary counter-cyclical policy anyway.
Plan A, then, should be to relax about borrowing. But we need, as a plan B, a set of fiscal measures that might be necessary to placate the bond markets.

One Response

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  1. paulstpancras said, on October 8, 2009 at 12:39 pm

    Why can’t Labour get the presentation of this debate right? Osborne performed well. But it was performance. Light on substance. I can’t believe that the Tories are stupid enough to go with neo-liberal twaddle. Can’t Labour attack that nonsense? Where is our British Krugman able to explain simply and pithily? We are letting Tories/Murdoch define the debate. Time for change?


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