The economics of the CSR – First thoughts
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.