60 Economists support delaying cuts.....

HAMISH_MCTAVISH

More than 60 senior economists have signed two open letters that back the chancellor's decision to delay government spending cuts until 2011.
The letters in the Financial Times say that any measures to trim the budget deficit this year could risk dragging the country back into recession.

They are being seen as a riposte to the 20 economists who on Sunday backed the Conservatives' call for cuts this year.

Those economists said cuts were needed in 2010 to reassure the markets.
They put this forward in a letter to the Sunday Times.

The Treasury recently said it it hoped the public deficit - the difference between government spending and the income it receives through taxation and other sources - would stay below £170bn for the current financial year. Figures released on Thursday showed that the government had to borrow a further £4.3bn in January to help cover the deficit.

'UK's image'
Those signing the two new letters include two Nobel laureates - Robert Solow and Joseph Stiglitz - and five former members of the Bank of England's interest-rate setting committee.

One of the letters, organised by crossbench peer Lord Skidelsky, accused the authors of The Sunday Times letter of trying to "frighten" the public over the scale of the deficit.

It asks how "foreign creditors will react if implementing fierce spending cuts tips the economy back into recession".

"For the good of the British public - and for fiscal sustainability - the first priority must be to restore robust economic growth," it says.

The other, organised by Lord Layard, emeritus professor of economics at the London School of Economics, says Mr Darling's plan for reducing the deficit was "sensible".

"While unemployment is still high, it would be dangerous to reduce the government's contribution to aggregate demand beyond the cuts already planned for 2010-11," it says.

'Wrong bandwagon'
The issue of reducing the government's deficit and wider public debts has become a political battle ahead of the general election.

A Conservative spokesman said: "Twenty leading economists, plus business leaders, including Richard Branson, agree with us that the failure to have a credible plan to reduce the deficit threatens to undermine the recovery and push up interest rates. "We are happy to have that debate with the government."

But a spokesman for Mr Darling said that the latest letters showed that shadow chancellor George Osborne had "jumped on the wrong bandwagon".

"His judgment is wrong and his approach would risk derailing the recovery," the spokesman said.

http://news.bbc.co.uk/1/hi/business/8523034.stm

There's been much talk on this board of late that most economists support deep cuts immediately, after the letter by 20 of them last week. Clearly, that is false.

It is obvious that growth should be the first priority, ad then the cuts needed will be smaller. You cannot just cut your way into balance, growth will be needed as well.

Charterhouse

Didn't you say the opposite just the other day?

Running_Horse

What if the cuts are to government jobs that don't really need to be done?

Should those of us in the private sector maintain the public sector, long after our own jobs have been cut?

HAMISH_MCTAVISH

Charterhouse wrote: »

Didn't you say the opposite just the other day?

No.

........

HAMISH_MCTAVISH

Running_Horse wrote: »

What if the cuts are to government jobs that don't really need to be done?

Should those of us in the private sector maintain the public sector, long after our own jobs have been cut?

I would tend to agree that the non-jobbers should be sacked immediately.

But you should probably address that question to the Nobel Prize winning economists who think otherwise.

Spiv_2

First Letter
First priority must be to restore robust growth

Sir, In their letter to The Sunday Times of February 14, Professor Tim Besley and 19 co-signatories called for an accelerated programme of fiscal consolidation. We believe they are wrong.
They argue that the UK entered the recession with a large structural deficit and that “as a result the UK’s deficit is now the largest in our peacetime history”. What they fail to point out is that the current deficit reflects the deepest and longest global recession since the war, with extraordinary public sector fiscal and financial support needed to prevent the UK economy falling off a cliff. They omit to say that the contraction in UK output since September 2008 has been more than 6 per cent, that unemployment has risen by almost 2 percentage points and that the economy is not yet on a secure recovery path.
There is no disagreement that fiscal consolidation will be necessary to put UK public finances back on a sustainable basis. But the timing of the measures should depend on the strength of the recovery. The Treasury has committed itself to more than halving the budget deficit by 2013-14, with most of the consolidation taking place when recovery is firmly established. In urging a faster pace of deficit reduction to reassure the financial markets, the signatories of the Sunday Times letter implicitly accept as binding the views of the same financial markets whose mistakes precipitated the crisis in the first place!
They seek to frighten us with the present level of the deficit but mention neither the automatic reduction that will be achieved as and when growth is resumed nor the effects of growth on investor confidence. How do the letter’s signatories imagine foreign creditors will react if implementing fierce spending cuts tips the economy back into recession? To ask – as they do – for independent appraisal of fiscal policy forecasts is sensible. But for the good of the British people – and for fiscal sustainability – the first priority must be to restore robust economic growth. The wealth of the nation lies in what its citizens can produce.

http://www.ft.com/cms/s/0/75b2481e-1cb5-11df-8d8e-00144feab49a.html

Spiv_2

Sharp shock now would be dangerous

Sir, Last Sunday 20 fellow economists wrote to The Sunday Times advocating a more rapid reduction of Britain’s budget deficit than is currently planned in the Pre-Budget Report. “There is a compelling case”, they said “for the first measures beginning to take effect in the 2010-11 fiscal year.”
We disagree.
First, while unemployment is still high, it would be dangerous to reduce the government’s contribution to aggregate demand beyond the cuts already planned for 2010-11 (which amount to 1 per cent of gross domestic product). Further immediate cuts – even supposing they are practicable – would not produce an offsetting increase in private sector aggregate demand, and could easily reduce it. History is littered with examples of premature withdrawal of the government stimulus, from the US in 1937 to Japan in 1997. With people’s livelihoods at stake, a responsible government should avoid reckless actions.
Second, Britain’s level of government debt is not out of control. The net debt relative to GDP is lower than the Group of Seven average, and on present government plans it will peak at 78 per cent of annual GDP in 2014-15, and then fall. Even at its peak, the debt ratio will be lower than in the majority of peacetime years since 1815. Moreover British debt has a longer maturity than most other countries, and current interest rates on government debt at 4 per cent are also low by recent standards.
Third, since the crisis began, private households and businesses have had to increase their saving in order to reduce their debts. It is this saving that finances the government deficit. If the government did not take up the slack, there would be a deeper recession. But fortunately, wise counsel has prevailed so far, and public spending has been maintained as an offset to reduced spending by the private sector.
Of course there needs to be a clear plan for reducing the government deficit. But the existing one for next year appears sensible. What is needed then is much more detail for the following years, and a radical plan for the medium term. That is what the debate should be about.
A sharp shock now would not remove the need for a sustained medium-term programme of deficit reduction. But it would be positively dangerous. If next year the government spent less and saved more than it currently plans, this would not “make a sustainable recovery more likely”. The weight of evidence points in the opposite direction.

The Second letter
http://www.ft.com/cms/s/0/7beb9b0e-1cdd-11df-8d8e-00144feab49a.html

Spiv_2

Riposte by 60 economists to calls for cuts

More than 60 leading economists have backed Alistair Darling’s decision to delay spending cuts until 2011, creating a dividing line within the profession on the crucial general election issue of how to tackle the UK’s huge public debt.
Two letters in Friday’s Financial Times warn of the risks of damaging Britain’s fragile recovery by “reckless” early cuts. They are a riposte to the 20 economists who wrote to The Sunday Times last weekend supporting the Conservative party’s argument that fiscal tightening should start this year.

The signatories to the letters include two Nobel laureates – Joseph Stiglitz and Robert Solow – and five former members of the Bank of England’s monetary policy committee, including Sir Andrew Large and Rachel Lomax, two former deputy governors. Alan Blinder, a former vice-chairman of the Federal Reserve, is a signatory.

Their position was supported almost immediately by another Nobel laureate, Paul Krugman, who wrote on the New York Times website: “The crucial thing to understand is that fiscal contraction of an additional one or two percent of GDP in the near future has essentially no significance for the sustainability of government finances, either in Britain or here.”

http://www.ft.com/cms/s/0/9fe18c22-1cdc-11df-8d8e-00144feab49a.html

Emy1501

Spiv wrote: »

First Letter
First priority must be to restore robust growth

Do they say anywhere where this robust growth is going to come from? Their arguments sound fair and reasonable if they can say where all the growth is going to come from. but its bit like saying Woolworths should not have been allowed to go bust and should have been able to keep borrowing as oneday it may have grown enough to make money again,

wymondham

This just shows how experts can be so divided as there were lots who penned their name to a letter saying cuts should occur sooner... I think we need to refer these two sides to Harry Hill who can decide the best way forward as only he can - "i like the 20 letter, but i also like the 60 letter, which is better???......"

ps. I think we'll have an election in April before things get even more dire..

Spiv_2

World economists join UK fiscal fray

The smell of gunpowder hangs in the air. Slide rules drawn and calculators loaded, economists have joined battle about how quickly the UK should correct its fiscal deficit of nearly 13 per cent of output, exchanging volleys of letters.Earlier this week, a corps of 20 eminent economists stated that further fiscal tightening should start almost immediately. Otherwise, they fear, investors may be spooked and long-term interest rates may rise. Returning fire, 67 venerable figures, writing in Friday’s Financial Times, believe the country should hold its ground and not tighten sooner than the government’s current plans.


The letters roughly shadow the position of the country’s main parties. The Conservatives have put themselves in the baffling position of both proposing to do little in 2010-11 while insisting that they would cut materially harder than Labour in that year. Still, they claim the support of the first letter. Labour will certainly be cheered by Friday’s epistles.
The UK should tighten as quickly as it can – but no more quickly than that. Britain’s recovery has been weak. Public finance figures, released on Thursday, were dismal. The UK ran a £4.3bn deficit in January – usually a surplus month when tax bills are paid.
In response, the yield on 10-year gilts rose by seven basis points, highlighting the cutters’ concern. The country cannot run large deficits indefinitely and markets could, one day, take fright. But, still, 10-year borrowing costs are low (a mere 4.2 per cent) and an immediate fiscal tightening would cut hard into domestic demand.
It is not clear what forces could offset such a contraction. Easier monetary policy would be of limited use: domestic credit growth is not a route to sustainable recovery and exports are unreliable. At a time when most of the world wants to export its way out of trouble, who is going to buy all those British goods?
So, as Friday’s regiment of letter-writers says, the government should start to cut no sooner than it currently plans. The Treasury should set out clearer policies for retrenchment – and contingent ones. If growth does return quickly, the state should move faster. Given enough detail, the nerves of skittish bond investors should be soothed.
Friday’s letters are an embarrassment for the Tories, above all, who sought to capitalise on the first letter. They must learn – soon – that their desire for simple political messages is no excuse for nuance-free policy positions.

FT Editorial

http://www.ft.com/cms/s/0/0b49a968-1cc4-11df-8d8e-00144feab49a.html