10 January 2013
Right at the beginning of this new year, the chief economist at the International Monetary Fund, Olivier Blanchard, has admitted that they had got it wrong over the impact that public expenditure cuts would have on countries’ economies.
At the beginning of the Eurozone crisis, mainstream wisdom strongly advocated swift and deep cuts in public spending, pronouncing that prospects for growth in the economy and increased employment rested upon them.
Forecasters then had estimated that for every £1 cut in public expenditure this would result in a loss of 50p worth of economic growth.
This was regarded as by some as “ a price worth paying”, short-term damage to the economy that could be accommodated.
However, that figure has now been revised upwards in a new research a paper by the IMF’s top economist, conceding that for every £1 cut in public expenditure, the upshot would be a loss of £1.50p worth of economic growth. (link)
These figures represent huge quantities of economic output lost.
The damage to the economies has been severe, considerably more than had originally been anticipated.
The striking admission was this :
“We find that forecasters significantly underestimated the increase in unemployment and the decline in private consumption and investment associated with fiscal consolidation”
Thus the policy of austerity has been shown to be counter-productive, and that a policy to boost growth by stimulating the economy should have been undertaken instead.
This is the view of Paul Krugman, the American Nobel Prize winner for Economics, who has described the policies of David Cameron’s Coalition as “failing dismally”
“It is deeply destructive to pursue austerity in a depression," he has said, and has proposed that government spending should be increased by 2 per cent of Gross National Product rather than be cut.
In my East End ward, my constituents will be pushed further into austerity , because the UK Government has chosen to cut public spending while the private sector shrinks.
This results in an even more intense recession which piles up an even larger budget deficit.
The main concern of my constituents are what money they have available for spending and for saving, how they will be able to pay for things for their families, and for the bleak future that faces them.
Unless the Government changes course and reverts to a policy that promotes growth instead, 2013 will be the worst year yet for cuts that will affect their everyday living.