By Michael Baxter 25 Feb 2010 [2 Comments | 1,147 views]
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Now the row of Britain’s fiscal deficit has reached new heights.
George Osborne finally starts putting some meat on his plans to slash spending, and yet the IMF comes out in support of maintaining spending for a while longer. Meanwhile, a currency trader has said if the fiscal debt is cut too soon, the pound will crash.
Georgy boy chose the occasion of the 2010 Mais Lecture yesterday to start putting some detail on how the government debt will be managed under the Tories. He wants to freeze wages for public sector staff, make changes in public sector pensions, and cut some benefits, especially those to the better off.
Meanwhile, the IMF has produced a reporting saying: “In general, fiscal and monetary stimulus may need to be maintained well into 2010 for a majority of the world’s economies, including several of the largest, although the timing of the exit is likely to differ substantially across countries.”
You will recall former stalking horse, not to mention Mr Spock look-alike, John Redwood, reckons that unless government spending is cut, the pound will fall off the edge of a cliff.
And yet a report from UBS has warned that if government spending is cut too rapidly, sterling could be savaged. George Magnus, a UBS economist and regular on BBC2’s Newsnight, co-wrote the report. It said that if government cuts were too great this will “endanger tax revenues, Britain’s sovereign rating, the recovery of the banking sector and the UK labour market.”
UBS is right, but so is George Osborne. The two Georges disagree, but they are both right.
Government spending has got to be cut. But if it is cut too quickly, the result could be a deepening recession. But then again, it is difficult to envisage circumstances in which cutting government expenditure would be good timing. Those who argue in favour of fiscal stimulus say, sure, we have got to stop borrowing eventually, but not now.
Okay, so when? The exit strategy is non existent, or if it does exist it is built on a wing and a prayer.
In other words, we are stuck between a rock a hard place.
The only possible solution would be for the government to carry on spending, like the IMF and George Magnus suggest, but to channel the money into areas that will create wealth for the future. See: Economist wars for a more detailed analysis
Yes. There should be some cuts, not excessive, but also investment in Research and Development, that’s the future… as long as any novelty can be developed and produced in house and not “unknowingly” exported and used by someone else.
R&D in manufacturing, IT and energy has to be the investment focus of the UK govt. The pounds is likely to remain low for some time so this can only help exporters. Admittedly we cannot compete with the lower cost base of third world nations but we can develop the ideas and export them. Surely the renewable energy market is something we should be developing especially with our engineering skills background and current knowledge base. Afterall the UK is still respected throughout the world for its engineering skills, albeit there are less of them.
Maybe it is just wishful thinking but I do believe we can come out of this mess stronger but we need to readjust ourselves as the world economies realigns from west to east and the new order. Reinventing our manufacturing base is just one idea.