The government must act more quickly to cut Britain’s huge budget deficit, a group of economists has said.
In a letter to the Sunday Times, the 20 experts say the lack of a credible plan threatens to push up interest rates and undermine the recovery. BBC.
I don’t know why almost every news service going is treating this letter as gospel:
It is now clear that the UK economy entered the recession with a large structural budget deficit. As a result the UK’s budget deficit is now the largest in our peacetime history and among the largest in the developed world.
In these circumstances a credible medium-term fiscal consolidation plan would make a sustainable recovery more likely.
In the absence of a credible plan, there is a risk that a loss of confidence in the UK’s economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery.
In order to minimise this risk and support a sustainable recovery, the next government should set out a detailed plan to reduce the structural budget deficit more quickly than set out in the 2009 pre-budget report.
The exact timing of measures should be sensitive to developments in the economy, particularly the fragility of the recovery. However, in order to be credible, the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament, and there is a compelling case, all else being equal, for the first measures beginning to take effect in the 2010-11 fiscal year.
The bulk of this fiscal consolidation should be borne by reductions in government spending, but that process should be mindful of its impact on society’s more vulnerable groups. Tax increases should be broad-based and minimise damaging increases in marginal tax rates on employment and investment.
In order to restore trust in the fiscal framework, the government should also introduce more independence into the generation of fiscal forecasts and the scrutiny of the government’s performance against its stated fiscal goals.
Tim Besley, Sir Howard Davies, Charles Goodhart, Albert Marcet, Christopher Pissarides and Danny Quah, London School of Economics;
Meghnad Desai and Andrew Turnbull, House of Lords;
Orazio Attanasio and Costas Meghir, University College London;
Sir John Vickers, Oxford University;
John Muellbauer, Nuffield College, Oxford;
David Newbery and Hashem Pesaran, Cambridge University;
Ken Rogoff, Harvard University;
Thomas Sargent, New York University;
Anne Sibert, Birkbeck College, University of London;
Michael Wickens, University of York and Cardiff Business School;
Roger Bootle, Capital Economics;
Bridget Rosewell, GLA and Volterra Consulting
Source: The Times.
20 economists don’t make a consensus or the correct answer – economics is a complex issue – and it certainly is influenced by your beliefs and priorities – I am of the opinion that it’s more important to nurture the recovery and jobs than worry about credit ratings and long term interest rates.
For instance Germany’s recovery has stalled with a GDP growth of zero for final quarter of 2009 – which begs the question – is Germany about to enter a double dip recession? Something to be avoided.
Then there is the question of the Euro currency and the Greek economy – if something doesn’t happen soon the Euro is going to come under pressure in Foreign Exchange Markets – and then there is Spain. A falling Euro is likely to have a greater effect on UK interest rates than government deficit.
It makes more sense to get a sustained recovery on the way and then look at the deficit – a promise to solve the problem in one parliament is at best a broken promise. But hey, what do I know I’m not an economist and never attend a prestigious University like those economists that signed the letter.
