Monday, 6 June 2011

Is plan A working?

Yesterday an open letter to the Chancellor was sent to the observer. In it a group of fairly prominent economists expressed concerns at George Osbourne's plans to cut the deficit and urged a "plan B" to focus more on jobs and growth. I'm going to have to admit I completely disagree with them that the government needs a "plan B".

They argue that government cuts are hurting growth and slowing down the recovery, which is true. They argue that lower employment and growth lowers government revenues and makes it harder to cut the deficit, which is true. They argue that the Chancellor therefore needs to create a plan B to boost jobs and growth in the economy in order to secure the recovery, which is not true.

What these economists don't seem to get is that every single extra pound we spend has to be borrowed. They keep talking about the benefits of more spending: jobs, growth, revenues but they completely ignore the costs. Namely increasingly government debt still further and the associated costs of debt repayments.

They point to the fact that economy has "flatlined" over the last 6 months, meaning that the economy is no larger than it was half a year ago. This claim is really just opportunism. I could say "the economy has flatlined over the past 4 years" because GDP is exactly where it was in 2007. But this is patently untrue, what happenned was we had growth, then decline and it is only the average which has "flatlined". The same is true here. Over the last 3 months, the economy grew overall. Over the last 9 months, growth. The last 12, growth. The last 15, growth. It is only the last 6 month period which shows a "flatlining" economy so using only that statistic is really nothing more than opportunism.

Last year the economy grew by 1.5%. The OECD, despite downgrading the growth prospects for the UK, still expects the economy to grow by 1.4% this year. In other words, whatever various economists and the Labour party keep saying, the economy is still growing, and growing fairly well.

The government aims to cut the deficit from £150 billion a year to £0 over the next 4 years. The government is cutting billions off of government spending, yet the economy is still growing at 1.5%, it doesn't exactly sound like the economy is "flatlining" does it?

What we must all remember is this. Even if GDP growth were to be 0% over the next 4 years, we would still be getting better off. This is because every year the government cuts spending and brings us closer to sound finances. So, we will have the same amount of GDP, but a lower deficit. The same amount of GDP, but better public finances. The same amount of GDP, but a stronger private sector. The same amount of GDP, but a stronger, more dynamic economy. The same GDP, but an economy less dependent on debt. When Labour (or their supporters in the economic profession) talk about the need to grow, remind them that GDP is not the be all and end all. That there is more to an economy than just spending, and that for all their scaremongering, the economy is actually recovering fairly well, if slower than we might have liked.

The next time someone (be it the labour party, think tanks or anyone else) tells you these cuts are damaging the economy, just remember. The economy IS growing, unemployment IS falling, the deficit IS going down, the economy IS recovering and, so far, plan A IS working. There were always going to be costs to cutting government spending, but growing at only 1.5% rather than 2.5% is hardly too much to pay to put government finances back on a sound footing, to put the economy back on a solid base and to deal with the economic mess bequeathed to the current government.